Measuring Performance : A Toolkit of Traditional and Alternative Methods [1 ed.] 9781317099161, 9780566088605

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A Gower Book

Measuring Performance

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Measuring Performance A Toolkit of Traditional and Alternative Methods David Jenkins

First published 2012 by Gower Publishing Published 2016 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017, USA Routledge is an imprint of the Taylor & Francis Group, an informa business Copyright © David Jenkins 2012 David Jenkins has asserted his moral right under the Copyright, Designs and Patents Act, 1988, to be identified as the author of this work. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data Jenkins, David. Measuring performance : a toolkit of traditional and alternative methods. 1. Strategic planning. 2. Performance standards. I. Title 658.4'012-dc22 Library of Congress Cataloging-in-Publication Data Jenkins, David, 1927 Feb. 23Measuring performance : a toolkit of traditional and alternative methods / by David Jenkins. p. cm. Includes bibliographical references and index. ISBN 978-0-566-08860-5 (hardback) 1. Performance--Management. 2. Performance--Measurement. 3. Organizational effectiveness--Measurement. I. Title. HF5549.5.P35J46 2012 658.3'125--dc23 2011031299 ISBN: 978-0-566-08860-5 (hbk) ISBN: 978-1-315-59439-2 (ebk)

Contents

Introduction1 Chapter 1

Common Sense About Measures

3

Chapter 2

An Introduction to Standard Accounting Doctrine

19

Chapter 3

Measures in Practice

35

Chapter 4

Measurement of Performance

51

Chapter 5

Reforming Measures

67

Chapter 6

A New Model – Productivity

81

Chapter 7

Spreading Measures

97

Chapter 8

The Measurement Toolkit

117

Chapter 9

Conclusion

131

References135 Index137

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Introduction The book is divided into nine chapters. The purpose of Chapters 1 to 4 is to examine, first, the practices widely used to measure performance and, secondly, the problems that are often encountered in applying them. The aim of Chapters 5 to 8 is to review the remedies available to reform existing practices and then to set out and evaluate an alternative model designed to effect better measurement.

Practices and Problems The first part of the book examines the prescription provided by standard accounting doctrine (SAD) for the achievement of its principal objectives and by contrast the way these are accomplished in practice. It also reviews the features of the organisation model best known as the command (or ‘classical’) version on which SAD depends for pursuing its aims. Later it analyses the reasons why the model lacks the capacity required to fully succeed and shows how it sometimes impedes performance and measurement. Chapters 1 to 4 also illustrate the advantages of measuring along the process flow (or chain) as opposed to measuring according to the vertical command structure. Finally, these first chapters seek to show that because organisations rarely perform in line with the expectations of standard accounting doctrine things go wrong, and that this is a source of costs that sometimes go unmeasured and unrecorded. We assess the record of orthodox accounting doctrine in accommodating the consequences of the disruption that occurs when events fail to go according to plan, concluding that in some cases the application of accounting rules reduces levels of performance and that, again, this outcome may escape measurement (for example, encouraging managers to achieve ‘favourable variances’ at the expense of those of their colleagues.

How to Get Better Measurement The early chapters suggest improvements that can be made to existing practices. The aim of Chapter 5 onwards is to outline an alternative model to that of efficiency, which has always been the overriding aim of orthodox accounting. The advantages of this model in measuring aspects of corporate performance that have been neglected by traditional doctrine, namely the capacity to respond to external challenges and to innovate and improve – the distinction between these two is explained – is presented. Further, Chapters 5 to 8 argue that the full benefits of using productivity as a vehicle for improving both performance and its measurement are unlikely to be gained without

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employing an organisational model that removes institutional constraints on efforts both to improve performance and to measure it. Finally, the book concludes with a comprehensive review of the tools available for measuring corporate performance.

chapter

1 Common Sense About Measures

Getting Measures Right Measures as a Potential Source of Intelligence The purpose of this chapter is to highlight the risk that those in charge inadvertently cut themselves off from.

Sydney at the Confessional I had an appointment with Sydney, a divisional general manager of Norfax, a company making carbon products and employing 1,400 people in total. As I entered his office I could see that Sydney was looking glum. I asked him how things were going. ‘Things are pretty dire, Dave,’ he began. He went on to explain: ‘Earlier this year things seemed to be going so well. As we approached Christmas things slackened off, but they often do at that time of the year. But they haven’t picked up since. We have had to shed some people.’ ‘Did you have no inkling that this was likely to happen?’ I asked. ‘No. There were no warning signs – nothing to indicate that this was going to happen. Sales simply fell off a cliff.’ Now, I had known Sydney for a long time and I was familiar with the business in his charge. I also knew that, short of the financial cataclysms that happen twice a century, sales rarely fall off a cliff. ‘Didn’t somebody notice a decline in orders and sales enquiries?’ I asked. Sydney shook his head. ‘Didn’t your salesmen pick up some signals out there in the market?’ ‘No.’

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I decided to try a different tack. ‘Sydney, can I ask you how often you talk with your salesmen?’ ‘To be honest Dave, not that often. They are like all salesmen – always bellyaching about how hard life is and the advantages their competitors have, that our prices are too high. I have heard it all so many times. You should know, Dave, you have worked with some of them. So really I don’t go out of my way to talk to them.’ I didn’t reply directly. Although I judged that some of his observations about his salesmen were justified, I knew that because most people I knew in the company felt that bad news was always unwelcome at the top, there was a tendency to both withhold information and to massage the data that was fed into the system. Eventually I said, ‘Yes, Sydney, I know salesmen can be a pain, but who else is in a better position to let you know how the market is looking?’ Sydney shifted uneasily in his chair. ‘I know. But you know what Alan (the Group Managing Director) can be like. Nobody wants to be the messenger. I think the reports we were getting from the field tended to be over-optimistic.’ Sydney was opening up now. ‘There is something else, Dave. I have to plead guilty on one count. Last year we had a lot of problems with a big order for Brazil. Everything that could go wrong with it did go wrong. The way things were going at one stage it looked as though we would make no money on it at all. It was a headless chicken episode. Fortunately we were able to rescue it, but we were working around the clock for weeks on end. I have to admit in retrospect that we did take our eyes off the ball, and for too long. You know as well as I do that when you get problems of that magnitude the adrenalin tends to take over and you can lose sight of the things that matter. Really there probably were some signals and perhaps there were some people trying to tell us but we were all just too busy.’ The principal purpose of measuring performance is to acquire the information needed to run an organisation. In the case of Norfax it was evident that there were flaws in the way the system worked. There was a reluctance to report figures that were believed to be unwelcome to those in charge. Those in senior positions like Sydney did not seek to gain intelligence about the market from those who were in a position to provide it. Finally, insufficient attention was being given to the data that was being reported. The problems Norfax was experiencing with the Brazil contract were no excuse for according insufficient attention to this data – and Sydney knew it. However, there was nothing unusual about these events at Norfax. A roll call of companies that have reached a premature demise for these same reasons runs into many hundreds and includes some great names like Marconi (formerly GEC) and BTR (now

Common Sense About Measures

5

restyled Invensys). It was a reason for the recent early departure of the chief executive of BP, previously better known within that company as ‘the Sun King’. The information that Norfax lacked was, of course, critical to its operation, but what it required extended more widely than this. For any enterprise, data must be available across the whole spectrum of activity in which it is engaged, and the quality of that information will depend on the way it is measured. To be able to measure information and any part of it there are three things that have to be done:

• the right things must be measured; • the measures used must be the right ones; • they must be applied correctly. The purpose of this and the other introductory chapters that follow is to consider their implications. There are three issues: 1. The need to avert the risk of measuring the wrong things. 2. The need to elicit the right behaviour. 3. The need to respond to whatever needs to be done.

Measurement of the Wrong Things The right things are first and foremost those that have to be done in order to achieve the corporate goal. This is a fundamental rule and it is the rule that is most commonly breached. As will be seen in Chapter 3, different parts of any organisation are apt to pull in different directions. When this happens, of course, the collective effort to attain the common goal is undermined. Yet the results of this divergent activity are often measured: worse still, they are also often rewarded.

Measures and the Way People Behave The Need for Clarity Overall, the way people behave is strongly influenced by the measures by which their performance is being judged. If the measures are not explicit, people will guess what they are. Sometimes there is a wide discrepancy between what are made known as the official measures and those that are perceived to be applied. If people are told, for example, that they will be judged on the quality of their work, but they know or suspect that it is the quantity produced that counts, they will draw their own conclusions. So both official measures and what are believed to be the actual measures that are used have a powerful influence over the way people behave. The way measures affect behaviour is not uniform – it varies according to the personal and organisation platforms at which performance is measured. These are at four levels:

6 1. 2. 3. 4.

Measuring Performance

that of of the basic tasks; that of supervisors; that of managers; that of the organisation unit within which they work, for example a branch, department store or factory.

At the Level of Basic Tasks In the past I have taken part in surveys in which people working at this level have been asked in face-to-face meetings how they see the measures used to monitor their performance. The principal features of the picture that has emerged are a limited understanding of what these were and, partly as a consequence of this, apprehension lest any information gathered might be used against them or their interests. As a result, the way they generally behave is best described as defensive.

At Supervisor Level Most supervisors have risen from the ranks of those executing the basic tasks. Their managers often leave them unsure as to the measures by which their performance is judged (see Chapter 4). So, like the people in their charge, their behaviour too is often defensive.

At the Level of Managers In looking at the behaviour of managers in response to measures, the majority can be divided into two broad categories. In many corporations there is a magic age – often somewhere between 35 and 40 – at which the thrusting young executive is transformed into the manager who has missed the boat and is now seen as having limited career prospects. The result is a minority of those who are still ambitious and the majority that have reluctantly settled for a less lofty perch. It is a characteristic of the aspirational minority that they can be counted on to sniff out the criteria (often unofficial) by which their performance will be measured. As a result, their single focus will exclude all others, even if – as is sometimes the case – they can see that these are crucial to the achievement of the overriding corporate goal. This has other consequences, which are often overlooked. As is well known, it has been common practice for many corporations to periodically introduce programmes, or ‘initiatives’, usually accompanied by a loud fanfare, which are said to be designed to improve the way things are done. There are a number of reasons why these rarely succeed, but one is the fact that the implementation of such campaigns is not included amongst the measures by which performance will be judged.

Managers at the Top It is often assumed that those at the apex of the organisation have a substantial degree of autonomy in determining the measures by which their own performance will be

Common Sense About Measures

7

measured. The reality is the converse. As will be seen in more detail in Chapter 3, the power of City-based pundits actually imposes tight constraints on their freedom of action.

Measuring Response Prominent amongst the right things that should be measured is the readiness to respond to whatever needs to be done. By far the most pressing amongst these is prompt action where the data tells you that the organisation or any part of it is underperforming. It is essential that the measures used reveal both the need for corrective action and the extent to which this has been forthcoming.

The Dangers of Being Dazzled by Numbers A predominant concern is with numbers, regardless of other dimensions of the work done. This is a practice with a long history. For the best part of a century it was the norm across industry, where it was best known as payment by results (or PBR). Then, in the 1970s, it fell out of favour in the UK, with the motor car industry leading the way (it was replaced by a practice called ‘measured daywork’, which was a form of hybrid; this had a brief lifespan). However, just as it was disappearing from the lower reaches of manufacturing concerns, it began to gain favour in company boardrooms and its attractions caught the eye of those in charge of organisations in the public sector, such as universities – it has long been common to measure departments by the number of articles published regardless of their quality. The commercial sector has a distinct advantage in this respect. Take the world of book publishing. One book editor may go for numbers: another puts a premium on quality and publishes a smaller number. Leave it at that and it is difficult to judge which is the better policy. However, the key factor in publishing is the number of books that find buyers. So long as the same marketing muscle is applied to the promotion of each book, it is the revenue it brings in that is the ultimate arbiter. It should be evident to all that any system for calculating corporate performance should focus on measuring the elements that are key to achieving the corporate goal. That this link is not always there should give those in charge pause for thought and an incentive to re-evaluate practices currently employed. Views as to what constitutes the right measure to apply in order to assess performance have evolved in line with changes in technology.

Visible Results Historically, the primary virtue sought by employers was that of hard work. In general, assessing how hard people work is notoriously difficult, but there were and still are a few exceptions. When agriculture provided large numbers with employment, the area ploughed in a day was easily measured. Some relics of early measurement practices still survive. Laying bricks is one of the few trades where an objective measure (the number of bricks laid in an hour) is recognised at law. Nowadays the opportunities to use such

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yardsticks are less common. With banks of computers and armies of workers spending the day peering into their screens, the relevance of the notion of judging how hard people are working has faded.

Measuring by Observation As will be seen shortly, Frederick Taylor, the world’s first efficiency expert, ordained that the only way to measure performance was by close observation – watching work being done and checking the result. This was feasible when technology was primitive, with most work done by hand. Nowadays the nature of work has changed to the extent that observation is rarely feasible or relevant.

Using Personal Experience A method of measuring work that is often overlooked is that of applying personal experience. Despite textbook admonitions to the contrary, a criterion often used in promoting a workman to the position of supervisor is personal experience of the work to be supervised. If a pavement has to be renewed with new paving stones, it is still common for this to be done by hand. Somebody has to estimate how long it will take. Few are in a better position to work this out than somebody who has sufficient experience of executing this work. He can estimate the time it will take (it is sometimes done by a white collar official, often called a clerk of works, whose estimates of the time required for such work to be done are often a source of contention).

The Quest for Objective Measurement For a long time the inherent subjectivity of assessments made by managers of the performance of individuals in their charge has been widely recognised. Reducing the scale of this risk was the trigger for a formula known as management by objectives (or MBO) popularised by Peter Drucker in his book The Practice of Management (1951). The core of the concept is a practice in which a manager and their subordinate meet at regular intervals – usually once a year – to set the underling’s objectives for the next period. It was a prescription that attracted a following in the UK for a decade or so before it faded from view, but which is still widely applied in the USA. Well before the idea of MBO emerged, the practice of setting targets had long been favoured in standard accounting textbooks, and in recent years this has spread rapidly from the private to the public sector. As already noted, what is measured – or seen to be measured – has the potential to exert a strong influence on behaviour. It needs to be recognised that the employment of both objectives and targets harbours risks that can lead to unintended consequences which are not in the corporate interest. Some of these will be reviewed in the next sections.

Common Sense About Measures

9

The Function of Data Nowadays how good your measures are is entirely dependent on the quality of your data. This in turn depends on how well your system for generating and handling data works. The ubiquity of computerised systems can cloud a picture which in reality should be very simple. The essentials for the operation of a data handling system are these: Data has to be collected. There is as yet no escape from dependence on human beings. Even with the most advanced computer systems available, somebody has to enter the information. Hence the importance of doing everything possible to ensure that the inputs are accurate. In discussions held with people at the workface the average estimate of such accuracy provided by workpeople has been 75 per cent. Next, of course, performance data has to be delivered to whoever is said to be in control of the work that has been measured. There are two key issues: 1. What happens to the data between collection and distribution? In a typical corporation

it will be recycled, ostensibly to make it more useful to the recipient. 2. The second central issue is this: measuring performance is one thing, pinpointing the

causes of underperformance is another. Clearly the two should be indissolubly linked. Wherever a target set has been matched or exceeded, all the recipient needs to do is to deliver more of the same. If the data you receive shows you are underperforming, you need to take corrective action. But first you have to track down the cause of the mismatch between target and achievement.

The Value of Data – the Acid Test It is worth asking this question: as recipient of data, what is it that you need in order to be able exercise total control of the activity your charge? These are the conditions that must be met:

• Data has to be presented in a way that you can understand, without having to seek explanations of what terms or figures mean.

• You can be confident that the data is accurate, relevant and up to date. • You are provided with the data needed to measure performance in achieving what has been planned.

• The reasons why performance is worse or better than expected should be crystal clear, without your having to spend time digging deeper for the information you need.

• The data provides enough information for you to be able to determine what needs to be done to correct underperformance.

• Where there is underperformance you have the resource or access to the resource needed to correct it – and without delay. It is necessary that all these conditions be met for the exercise of complete control. A substantial body of evidence will be presented in the pages that follow to show that for many managers this requirement is sometimes not matched.

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However, a different outcome can be achieved if the responsibility for controlling day-to-day activity is devolved to those charged with the execution of the basic tasks. Such was the case with Topbread.

How Topbread Showed the Way British Bakeries, better known as Hovis, is a large company that has numerous units scattered around the UK. One of these, situated in the London suburb of Erith and producing around a million loaves a week, had proved to be a source of problems ever since the company invested heavily in new equipment five years earlier. Month after month the bakery’s managers had been castigated by head office for failing to meet their targets: throughput was rarely adequate, waste was far too high and unachieved targets in terms of machine availability were a constant source of frustration. Bob King, who had recently been appointed as group operations manager, suggested to Maurice, the local manager, the idea of setting up an improvement team consisting of people executing the basic tasks. Maurice, by this time ready to grasp at any straw, readily agreed. However, he took the view that head office had in the past been a source of bright ideas, few of which had helped him to improve the performance of the plant. So Maurice did not nurse great expectations. A team consisting of production and engineering workers was established and they accorded themselves the title of the Topbread team. Once it had been trained, the team was invited to set its targets (which were then sanctioned by Maurice). Steps were taken to ensure the availability of all the data needed by the team to measure their achievement. Nick, a young and energetic junior manager, was assigned to work with the team (this was in addition to his normal day-to-day tasks). At the start, the members of the team made it plain that they had serious doubts as to how genuine their managers were in inviting them to take a bigger part in the running of the plant. A key factor was the readiness of a few influential members of the team to give Maurice the benefit of the doubt and to really put the declared intentions of their masters to the test. The result was spectacular. Within three months the plant was meeting all the targets that had been set by head office. There could be no argument as to this achievement. The results appeared in the official performance figures submitted to head office by Maurice. There is a lot that can be learned from the experience of Topbread. A key ingredient in the success of the team was the fact that the data provided matched all the criteria outlined above. They had all they needed for day-to-day control. The data was transparent and it was easy to pinpoint the reasons wherever the results were other than those expected. At the first signs of things going adrift, prompt action was taken: and that of course is what control is all about. But there was a distinctive feature about the data they used. Very little was derived from the corporate data information system: its primary source was local. Some was already available, for the most part team members had to collect it for themselves. This experience is not restricted to the Topbread team. In numerous other cases which my colleagues and I have witnessed at first hand a similar pattern has emerged. In excess of 90 per cent of the data used to exercise control has been drawn from local sources as opposed to the corporate system.

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11

The Topbread achievement gives rise to a bigger question. The success of the team was remarkable. Targets were matched or exceeded. They had all the information they needed. Prompt corrective action was taken where needed. The question is this: if this can be achieved at the local level, why can it not be done on a wider scale across the company as a whole? It is the purpose of the pages that follow to shed light on the nature and scale of the impediments that stand in the way and to show they can be removed.

Applying Measures Correctly – what may Happen if you Don’t The best way to bring home the importance of supplying measures correctly is to consider what can happen if they are not. This chapter sets out the objectives of measures of performance, and the achievement of some or all of these will be impaired or frustrated by shortfalls in application. No measures are proof against the risk of misapplication. It may happen at any level in the organisation. The gravity of the consequences range from contributing to the demise of a business, as was the case with Marconi, which jeopardised its future as did Norax (see above) to the demotivation of individuals who are often key players.

Little Local Difficulties I was responsible for a time to a manager called Neville. His favoured tactic was to ask me daily what was I doing about some aspect of what he considered to be my job and of which in many cases I had been unaware until that moment. The result was that each day brought a new priority, leaving me insufficient time to get any one task completed. Seeing to it that I remained unsure of what he expected of me – and consequently how my performance would be measured – was Neville’s stratagem for achieving his purpose: that of encouraging me to look elsewhere for employment. (Things did not turn out as Neville had planned. As a result of the appointment of a new chief executive, within months I found myself at the same level in the organisation as Neville. I was very fortunate. Not everybody has such luck.) Just how badly an MBO system can go wrong as the result of managerial ineptitude is revealed by the case of Ernest. As engineering manager of one of the many plants of Flimsco, a US-owned multinational and manufacturer of chemical-based products, his task was to ensure that the machines in his plant kept running. The company applies the practice of management by objectives. The way performance review is conducted follows the standard pattern, with each manager meeting with their subordinates in turn to set their objectives (in this case called key result areas) for the coming year. In January Ernest was given ten objectives to be achieved within the coming year. Three months into the period there was an unexpected development. Head office in the US requested that Ernest take charge of the installation of some new equipment in a factory recently constructed in the Far East, an assignment that took six months. At the end of the year Ernest met with his manager, Archie, to review his performance. Archie began by remarking that only six of the ten objectives had been achieved. Ernest pointed out that when his programme of objectives had been set at the beginning of the year neither he nor Archie knew that he would be absent from the factory for half that period. Archie was unimpressed by this argument. Four of the ten targets were incomplete. As a

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result Ernests’s performance rating took a knock. This in turn affected the outcome of the annual salary review.

Company-wide Consequences What happened to Ernest was the consequence of ineptitude on the part of his manager, but misapplication of measures may stem from another source. The fault may be embedded in the system itself. I worked for some time as a consultant at another US-owned company, Blaydex. It produces a range of toiletries and is a household name. During the assignment the managers with whom I was working were preoccupied by a dilemma created by their MBO scheme. The time for setting the objectives for the coming year was approaching. Each year subordinates were expected to propose to their managers the objectives they felt appropriate for the coming year. However, this year the rules had been modified. The custodians of the system at the US head office had decreed that each subordinate must now be set 24 objectives – no more, no less: this regardless of what the job required. One young manager wailed, ‘I can’t get together more than 14, no matter where I look.’ The result of these concerns was a curious outcome in which in the effort to ‘make the numbers’ managers were swapping objectives, many of which were irrelevant to the tasks they were there to do. Hence a production manager, for example, was appropriating a target of improving the organisation of the sales office – something of course which was outside his jurisdiction altogether. When I raised this with the manager concerned, I was told: ‘It doesn’t really matter: nobody over there (at head office) is bothered so long as the numbers are right. They are just counted. I don’t think anyone bothers to read them. They are just filed away.’ Events at Flimsco and Blaydex are examples of how systems that have the potential to work well can be deeply flawed either by bad design or by personal incompetence.

Escalator Targets There are other practices said to have the capacity to measure performance that can serve to undermine it. These include the practice of setting escalator targets. Motco is a multinational that makes motor cars. Its factories span the world and those located in the UK form part of the European division. Each year every factory is set targets. Every year the targets are pitched higher than the last. The way that measurements are calculated is complex and the administration of the scheme is regarded by managers as devious. So what happens is this. Say the plant has achieved a target that is rated as an efficiency of 6.5. They are told: ‘We are satisfied with this year’s plant performance. Next year the target will be 5.8. And by the way, you will be pleased to know your colleagues at the Riverside plant have already reached 5.6.’ For managers this creates a quandary. The message reads: ‘The better we do, the harder it gets for us. On the other hand, if we don’t show (apparent) improvement, the spotlight will be on us. We will feature in the bottom segment of the company league table and have a place in the corporate pillory.’

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13

Faced with this dilemma, managers will see just one escape route: to navigate the system so as to make their results acceptable: good enough to be respectable but not so good that to improve on them next year will create a bed of nails. The aim is to massage the figures to steer them into a neutral zone in the corporate league table. This practice produces a result known by the company’s managers as ‘the three Fs’ – fudge, fake and fabricate. An outcome of these practices used by those in charge to measure performance is that energy and ingenuity which should have been invested in genuinely improving the efficiency of the business is diverted into the manufacture of a picture that will keep top people off their backs: in the case of Motco leaving them more time to get on with the job of making motor cars, which, they would argue, is what they are really there to do.

Conclusion Every organisation needs to measure its performance and that of the people it employs. For measures to be accurate and reliable, there are fundamental rules that need to be applied. The consequences of ignoring or misapplying them undermine performance and so impede the achievement of the corporate goal. How to make more productive use of measures is the subject of this book. However, first we need to consider the merits and shortcomings of an idea that in recent years has come to exert a pervasive influence across the world of corporate measurement: the concept of value.

The Emergence of Value as a Measure The Topbread team had a clear goal. They assumed that this was in alignment with the company goal and in this they were correct. They needed to produce the maximum amount of bread of the required quality with minimum waste material within each sixday week. The team’s achievement then had to be put together with those of all the other departments: this would constitute the achievement of the bakery and was in turn to be amalgamated with the results of all the other plants to produce the divisional achievement. Finally, the results of all the six divisions of the company would coalesce into the corporate result which would then be matched with the corporate goal. This all sounds tidy and it is how the textbook describes the process, but in practice there is little that is neat and symmetrical in the world of targets. The central dilemma of any organisation is that much of the activity that takes place is not directed to attaining the corporate goal at all. This is an issue that is addressed in some detail later in these pages. But there is another element on the loose which is undermining the primacy of the conventional corporate goal of ensuring that the colour of the numbers emerging in the balance sheet remains black. This is the current popularity of the concept of value. It is a fashionable wheeze amongst a particular interest group. Its members sport a range of titles. ‘Analyst’ is the word they themselves favour. They are employed in the main by banks and brokers. Some have qualifications in economics or accounting. They are City-based in the main. Some have a background in banking; few have practical business experience. They would

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probably tell you that it is necessary for the practice of their trade. They claim to have substantial expertise in the analysis of the apparent performance of listed companies. Over the past three decades in a world the walls of which are textured by spin and Chinese whispers, these have proved hugely successful in constructing a position of influence which has enabled them to call the shots and determine the language in which business issues are discussed. In their lexicon no term has figured as prominently as ‘value’. Those in charge of listed companies have felt compelled to kneel before the altar of shareholder value. Debate has been conducted in the analysts’ own vernacular. So company boards and such adventurers as venture capitalists have been criticised for ‘hollowing out’ shareholder value. All this has served to befog the corporate purpose. Adding value has come to compete with the less fashionable goal of making an adequate return on capital. The acid test of their fitness for the place of an organisation’s goal is the extent to which they serve the cause of performance measurement. While value is rarely absent from the discourse of City sages, few have bothered to consider what it means. They are not alone in this, as will be shown shortly. For those who have the interest, a bit of history will not come amiss. It has more to offer than contemporary business education.

What Value Means For the clearest answer you have to go back to the roots of Western civilisation. For the Greek philosopher Aristotle and his contemporaries, economics centred around the household, but he had plenty to say about value. This he divided into two categories. He took a homely example to make his point. The owner of a shoe, he explained, could use it for two different purposes. He could wear it. If he wore it, it was of value to him: this he called utility value. But, he continued, the shoe could be used for a different purpose. If he was already well shod, the individual could exchange his shoe for some other article that he needed. If this happened the shoe had exchange value. Over the ages this idea has proved to be the single reliable guide through the dense tangle of elaborate theories that have been spun around the idea of value. It was a very long time before the earliest writers about a subject nowadays called economics caught up with Aristotle. Interest in the question of value was resurrected by Adam Smith, who declared that ‘the sole source of value was the quantity of labour embodied in a commodity’. So it was Smith who first coined the term ‘labour’ to describe those who executed the basic task (a convention later absorbed by standard accounting doctrine and used to this day). Labour is the primary consittuent of value embodied in the product. Smith did not see the need to measure it. The economists who succeeded Smith made a practice of weaving their ideas around labour as the source of value. Karl Marx went one stage further. He declared that the purpose of capitalist production was the creation of what he called surplus value, which was automatically transformed into capital, which accumulated as a result. There was something mechanical about the process (not surprising perhaps in this early age of the machine). The extent to which this

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happened was determined by the number of workers taking part and the way they were used (‘exploited’, in his words). It was the ubiquity of a workplace at which people toiled with their hands that accounted for the central position of labour at the heart of the economists’ idea of value. The marketplace had by now receded from view. However, the theory of labour as the prime source of value was demolished in one blow by a lesser-known economist, James Mill (father of the famous political scientist, James Stuart Mill). He quietly pointed out that wine kept in a cellar will increase in value purely as a result of the passage of time: ‘no human being has approached the wine or spent upon it a moment or a single motion of its muscles’ (quoted in Roll 1955). Yet, he argued, the value of the wine might increase by one- tenth in a year. This, of course, will not be news to people in the wine trade these days or to those who make a practice of collecting fine (and expensive) wines. This argument was a clincher. Mill brought the curtain down on labour as the sole source of value. The notion of exchange value reasserted its supremacy.

The Elusive Art of Valuing Assets The contribution that the concept of value makes to the measurement of performance remains open to question. The sales forecast, which is the foundation of the corporate annual accounts, is somebody’s guess, and unless they can be tested today in the marketplace, the value of many assets is also somebody’s guess. The problem is that there are accounting rules and conventions that insist on things being valued. Of these the most tendentious is a notion that goes by the name of goodwill. This is called an intangible asset and is said to represent the extra value ascribed to a company by virtue of its brand and reputation. These in turn are considered to be part of the company’s ‘book value’. Yet the figures now posted as representing value remain speculation – no more. A survey of US businesses conducted by a major investment bank concluded that goodwill accounted for 10 per cent of their assets. This proportion was found to be highest in healthcare, consumer goods and telecoms. None of this can be insulated from the condition of the national economy. If it deteriorates sharply, companies are expected to mark down the value of these assets. In the case of supermarkets, for example, where the land and buildings they own is generally a large part of their asset base, a steep drop in property prices has a major impact on what they are worth. This mark-down in value may be sufficient to turn the colour of the corporate balance sheet from black to red. The scale of the gap that separates the value put on assets and that determined by the marketplace is best displayed in its application to brands and the corporation itself.

Putting a Price on Brands It is not so many years ago that interest in the subject of brands was confined to textbooks on marketing. No longer. Nowadays it figures as prominently in the vocabulary of politics as that of business. Rebranding has become highly fashionable, spreading from business to government and political parties.

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In the world of business brands are nothing new. Coca-Cola® and Microsoft® compete for top place as the world’s best known. If you want to create a new brand name for a product or service it will cost you millions and even these vast sums are no guarantee of success. Putting a value on a brand is notoriously difficult. When Nestlé, the world’s largest food maker, made a bid for Rowntree’s of York in the early 1990s the coveted prize was the Rowntree brand. The price Nestlé paid for it was three times the value that had been determined by Rowntree’s accountants.

Takeovers – Putting a Price on a Company In a world in which it has become increasingly common for companies to be acquired by others, the value of companies becomes the prime concern. When this happens the value of the target company becomes the central issue. As is well known, every listed corporation has an official value called its market capitalisation. But once it has become the subject of a bid (‘put in play’, in the patois of City analysts), this drops out of the picture. The level to which the target company’s value is raised depends on the nature of the bid and the events that follow. If the bid is deemed friendly and the price agreed amicably the increase will probably be modest. The alternative scenario is a contested bid in which the offer is rejected. This will generate a substantial rise in the share price of the target company. A third situation is where a bid has been made and a second predator joins the contest. As the share price of the target company rises steeply, so does its value. Until a victor emerges, the share price will gyrate wildly and the value of the company will oscillate in response. The acquisition of the target company has a consequence which may seem strange to anyone who dwells outside the esoteric world of accounting doctrine. Assume the book value of the target company is £50 million. The predator pays £70 million to acquire it. The premium of £20 million is regarded as goodwill and absorbed into the balance sheet of the predator – a reason why sometimes a company that is in the commercial doldrums may make a bid in a gamble to shore up its ailing balance sheet.

Valuing the Family Silver In the 1980s the Thatcher government embarked on a programme to transfer to the private sector the publicly owned utilities and the public stake in commercial companies – notably British Petroleum. It was a former prime minister, Harold Macmillan, who coined the phrase ‘selling the family silver’. The biggest dilemma faced in this massive disposal programme was how to place a value on these organisations. The services of legions of consultants and accountants were enlisted to assess the value of each organisation that was placed on the block in turn. Despite claims made for the rigour of their financial analysis, in each case the figure arrived at has proved to be a matter of guesswork. In every instance it proved difficult to get the acknowledgement of City critics that they had got the price right. If after transferring a business to the private sector it floundered, there were accusations that the price was too high. On the other hand, if a

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business flourished, officialdom was taken to task for selling it too cheaply. A recent case is that of a business engaged in defence research. This was the government sale in 2003 of an agency previously controlled by the Ministry of Defence to a sharp firm of traders that makes its money by buying undervalued businesses and selling them on at a profit. The price paid by the traders was £340 million, representing the official valuation. Two years later when the traders floated it on the London Stock Exchange, its value proved to be £1.3 billion. And so, of course, the government was accused of selling its newly formed company on the cheap. The National Audit Office conducted an investigation which valued it at £2 billion. The more sober broadsheets made much of this but this criticism was misplaced, for this assessment signalled a return to the world of guesswork. The true figure remained that which it fetched in the marketplace. The importance attached to putting a value on assets in a world insulated from the marketplace has to be questioned. This onerous and unenviable task falls to the custodians of the corporate finances. A slavish adherence to established practice stands in the way of a frank admission by the finance fraternity that this at best is an exercise in approximation. The concept of value is not suitable for presentation as a showcase of accounting exactitude.

Conclusion For anyone who wants to find out what an entity is worth, Aristotle is still a surer guide than the soothsayers who congregate in and around the City of London. Away from the marketplace value is no more than somebody’s best guess. As has been seen, time and again, value has either expanded or shrunk as soon as a ‘for sale’ sign is pinned to any item – be it property, a brand or a corporation. As a concept, value is often amorphous and it is inherently unstable. For all these reasons, value does not make for a reliable measure with which to keep track of performance. It is necessary to look elsewhere. A natural place to start is to examine the measures that have been employed for this purpose for a century.

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chapter

2 An Introduction to

Standard Accounting Doctrine

The Topbread team had a clear goal. They assumed that this was in alignment with the company goal and in this they were correct. They needed to produce the maximum amount of bread of the required quality with minimum waste material within each sixday week.

The Idea of Command as the Source of Accounting Doctrine The champions of standard accounting doctrine (SAD) are clear as to their goal: to increase efficiency (although they prefer to describe it as ‘efficiencies’). The key to increasing efficiency is the exercise of control and the instrument for control is an organisation most commonly known as the command model. The command model has military origins. It is worth noting that an aim for some of the earliest British writers on organisation, who included Colonel Lyndall Urwick (1944), was to adapt them to a business model. The military roots of the idea are evident. Some army terminology still lingers with the distinction between ‘line’ managers, in charge of an operation such as manufacture or sales, and ‘staff’ whose role is to provide advice. This is the model the promoters of SAD adopted as an instrument for control, which they have extended by converting departments from an administrative device into units for the control of costs, renamed ‘cost centres’ or ‘cost pools’, an expedient explored in more detail later. And it is from this base that measurement starts. The principal features of the command or ‘classical’ organisation model as expounded by Urwick are as follows:

1. Top-down Given the military source of the concept, it is hardly surprising that the model is adamantly top-down. This is based on the precept that those at the top have knowledge to which those further down the chain do not have access.

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2. The Issuing of Instructions This monopoly of knowledge makes it essential for those at the top to issue instructions to everybody positioned further down the chain. Otherwise, the theory implies, they will not know what has to be done. To facilitate this process, the shape of the command model ensures that the management levels cascading down the hierarchy act as amplifiers ready to broadcast commands (see Stewart 1997).

3. Employees are there to Execute Instructions There are variations on how this principle is expressed. It is at its clearest in the common law rule that declares it to be the duty of every employee to obey all lawful orders. Urwick makes no mention of the possibility of orders being questioned and in the absence of an expressed view, one can only surmise. Given his military background it is likely that he would accept questions seeking clarification of an instruction received. It seems improbable that he would countenance the practice of asking the reasons why. There are many senior managers who would share this view, and not only within the commercial sector. During a consultancy assignment in a hospital on the outskirts of London the order was issued for all nursing staff to record certain information in considerable detail. When I asked a group of nurses with whom I was working whether there was any explanation as to why this was needed, my naivety was greeted with hilarity. The reply was, ‘That is not the way a hospital works.’

4. There must be Close Supervision Instructions have been issued. People at work have to be watched to ensure that these are obeyed. It is under the umbrella of compliance and supervision that SAD and Taylorism (see overleaf for information about Taylor) share the most common ground. Take this quotation from a standard textbook on management accounting: Control can be achieved by having superiors watch and guide the actions of subordinates e.g. where the foreman watches the workers on the assembly line and ensures that the work is done exactly as prescribed – the exact quantity and quality of work should result (Drury 2008).

As part of this guide for those employed to deploy the skills required for surveillance, the following is offered: ‘Precise times must be secured by a detailed study of each operation based on a specification of materials, labour and equipment by controlled observation’ (Drury 2008). In Taylor’s day, of course, all this required an army of time and motion functionaries. Nowadays these are an endangered species, so replacements have to be found: you still need staff to keep a check on the work that is being done, and on what results from it. These substitute officials appear in a wide variety of plumage, with such titles as ‘inspector’, ‘quality controller’, ‘industrial engineer’ or just plain ‘supervisor’ and form part of an apparatus that is there to exercise surveillance. Such are the primary characteristics of the organisational model on which the exponents of SAD depend for achieving their goal of control. It is also the chosen

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instrument for the measurement of performance. The extent to which these objectives are achieved in practice will be examined in Chapter 3.

Frederick Taylor: the Arrival of the Efficiency Expert Taylor is important for measurement because he has exercised a deep influence on SAD. The command model sits easily alongside a set of notions best known as ‘time and motion’ or ‘work study’. One purpose of this book is to examine the contribution of an American, the first (self-styled) efficiency expert, whose influence on SAD has been as farreaching as any other single individual. After surveying the organisational context in which these branches of accounting doctrine (cost and management) are applied, we will return to this subject in Chapter 5 in order to assess how well it has been able to accommodate the issues that have been raised.

The Shadow of Taylor I have known accountants who have never heard of Frederick Taylor. Despite the remarkable lucidity of his writings, I have yet to meet an accountant who has read his hugely influential work, Scientific Management, published in 1911. Yet nobody has made a bigger impact on standard accounting doctrine and the way the work of people is measured than Frederick Winslow Taylor, an American engineer who lived most of his life in the nineteenth century. The cradle of the idea of efficiency was the factory, and it was here that Taylor developed his theories. Central to his method (he called it a science) was making the most efficient use of time. Taylor, viewed as a black sheep by his family, most of whom were considered professionals in Pennsylvania, used social connections in order to secure two apprenticeships in succession. On completion of these, he set up shop as the world’s first efficiency expert (although he described himself as a ‘consulting engineer’). As his selfdetermined title indicates, he was also the world’s first management consultant: all the early consultancy firms that were established in his wake made their money by selling time and motion techniques.

The One Best Way Taylor’s objective was to get work done in the shortest possible time and to get it done as it should be. His prescription insisted that every job had to be done in the ‘one best way’ – an argument which posed an obvious question: who should decide which was the best way? Doubtless the workman would have some views as to which was the best method: Taylor would have none of this. It was central to his doctrine that the one best method could be determined only by an official trained to apply Taylor’s time and motion techniques. This the official would do by observing and recording the way a job was done, using a stopwatch to time how long each task (he called them elements) took. The observer

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would then divide the job into its elements. Finally these would be reassembled, and any unnecessary movements would be ‘thrown over the fence’. How the application worked in practice was graphically captured at the Midvale steel works in the mid-1870s, where, standing stopwatch in hand beside the sweating giant of a workman who was bent over his spade, Taylor famously barked: ‘When I say shovel, you will shovel. And you will stop only when I say stop.’

Method Prescription and Accounting Theory The central notion of determining precisely how a job should be done has been incorporated into SAD, which insists that the workman should follow the prescribed method and that he should then be watched to ensure this happens. Clearly the ability to establish the correct method is key, and therefore what qualifications might be required for this task is a question of some importance. It was quite by chance that the answer came my way.

Making Experts Quickly In an era when time and motion was widely used across industry in the UK, the company for which I worked found that it was short of staff with the necessary experience and skills to do the job. Shop-floor workers were invited to apply for these vacant positions with the promise of training that would equip them to do the work. The task of providing the training was added to the responsibilities I already had. My concern was that I had no idea how long the training should take. I was fortunate in having somebody already working with me who had the background needed to provide this training. I asked him for an estimate of the time required and he advised me that it would take 10 working days. Candidates were selected (the majority were shop-floor workers) and the training took place. As my colleague had predicted, it was completed in the estimated time. They then spent a further 10 days learning to apply their newly acquired skills in the workplace. At the end of that time they were assessed and declared competent to measure the work their former colleagues were doing. This achievement told me what I wanted to know about Taylor’s doctrine. The question had been ‘What did it take to produce any one of Taylor’s experts?’ The answer was plain. In a month you could reincarnate an ordinary workman who emerged a fully fledged time and motion expert. This was all that was required to qualify him to measure the performance of his erstwhile colleagues. So Taylor’s doctrine can be summed up as follows:

• work must be done in the shortest possible time; • the speed with which work is done must be measured; • there is only one correct way of getting work done and this must be used to get work done in the minimum time;

• the way every job is done must be tightly prescribed. All these rules must be applied for work to be correctly measured.

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It has been the purpose of this chapter to demonstrate the shortcomings in Taylor’s concept of scientific management and how because of these shortcomings it does not provide a solid platform for the measurement of performance. The advantages are not apparent in according them an important place in standard practice. In fact the limits on the value of much of Taylor’s central doctrine began to emerge during his lifetime. In 1913 Taylor delivered a four-hour lecture on his techniques at the Packard Motor Company in Detroit. When Henry Ford heard about it at his plant at Highlands Park – just down the road from Packard – he is said to have laughed. ‘Why bother to time jobs,’ he mused, ‘when you can build a machine to replace them?’ And of course Ford was right. What killed time and motion was the replacement of manual work by machines. As a result, people working with their hands or tools were replaced by machine minders. The pace at which a minder works is determined by the machine itself, so the machine came to replace the man with the stopwatch. Other ways of measuring performance had to be found. There is another constituent in what came to be called Taylorism which has made a major impact on SAD. As will be seen shortly, the central element in the theory is the corporate plan. No precept in Taylor’s concept of scientific management has been more influential than that of his formula for planning work. This was in fact a natural extension of time and motion – the man with the stopwatch was transformed into ‘the man in the planning room’. Just as prescribing work is said to require expertise, so, it was claimed, was the planning of work. As will be seen later, separating the planning and execution of tasks has often been a cause of disruption in putting plans into practice. This in turn has had implications for the measurement of performance.

Budgets, Targets and Standards ‘At the beginning was The Plan. The plan is at the centre of standard accounting doctrine. It is central to the purpose of exercising control. It sets the parameter for the measurement of performance’ (Drury 2008). The instrument for the execution of the plan is the corporate budget. The budget is invested with the capacity to achieve the five key corporate objectives: communication, planning, control, coordination and motivation – all necessary for optimal business performance. Recently the exponents of SAD have come to acknowledge that the objectives of the corporate budget are such that they sometimes conflict (Drury 2008). And, as the pages that follow will show, achieving these aims has often eluded the grasp of the most gifted and energetic business chiefs.

Communication For the adherents of SAD the concept of communication is constrained. It does not extend beyond the communication of the plan. Every manager should know what the plan is (Drury 2008).

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Planning Communication is essential because all managers have a part to play in implementing the plan. If a manager does not match what is expected of him, there will be a deviation from the plan. If there is a deviation, an investigation must follow (Drury 2008: 354). This focus on pinpointing deviation from the plan is the key to control. It has the effect of casting the accounting function (often known as the finance department) into a policing role.

Control The issue of control is examined later.

Coordination Although the territory staked out for the budget is already extensive, it does not end there. The issue of the seemingly intractable problems experienced by those in charge in seeking to pull together the different activities to be found in any organisation will be examined in some detail later. This task is not restricted to the business segment. It is equally pressing in the public sector as official aims to secure ‘joined-up government’ attest. The exponents of SAD do not give the same weight to such concerns as those in charge of organisations. As part of the preparation of the corporate budget – usually an annual event – each department and function submits its bid for company funds. The sum of these often adds up to a figure that exceeds the total allocated to the planned company spend, so something has to give. Judgements have to be made on the merits of the proposals put forward. Doctrine asserts that this reconciliation, conducted amidst the clamour of competing claims, is sufficient to achieve coordination (Drury 2008: 355).

Motivation The budget is said to have the power to motivate managers and to measure their performance. This mechanism is easily explained. The corporate budget supplies the material from which personal and departmental targets can be fashioned and the availability of these, it is claimed, is sufficient to motivate managers (Drury 2008: 356).

Doctrine’s Case for Setting Targets Advocates of SAD make it plain that ‘managers perform better where they have a defined quantitative goal to match than where it is absent’ (Drury 2008: 402). It is also expressed in slightly different terms: ‘People will perform better with targets and an understanding of the standards that will be used to interpret them’ (Drury 2008: 402). These targets are said to be the result of a substantial volume of research.

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Targets: the Options For the uninitiated there is copious advice on how to set targets. The options are: the historic approach, the engineering option and that of negotiated targets.

The Historic Approach The historic approach relies on data of past performance and allows an increase to cover expected price changes. This option gets no more than lukewarm endorsement (although it is the most widely used) because ‘past data may include “inefficiencies”. You are warned that the historic option may not be suitable for setting more “demanding” targets’ (Drury 2008: 406).

The Engineering Formula This is presented as an alternative formula. In the lexicon of SAD ‘engineering’ stands for Taylor. It is described in these terms and targets may be set by closely observing processes to determine the quantity of labour for a given output (Drury 2008: 406–7).

Negotiated Targets As the next section will make plain, this process is not always free from difficulty and this complicates the task of providing clear advice.

The Tricky Task of Setting Targets On the face of it any manager required to set targets should be able to do so, so long as they have a departmental budget of which they are formally in control. However, for reasons examined shortly the contents of such budgets do not often readily lend themselves to the provision of targets. And because there are many managers who are not responsible for budgets, this in any case is not a potential source that is open to them. So, if you are like Mark, a young man appointed to his first position as a manager, where can you turn to for advice? Because accounting textbooks emphasise the importance of setting targets this is a source from which he may seek guidance. The method employed in this chapter to assist in presenting the advice available from this source is to take the imaginary case of Mark, who in his search for advice goes to his company’s finance department, having made an appointment with an approachable and friendly member of its staff. The replies of his guide that appear in bold print are all drawn from one of the best known standard textbooks on management accounting (Drury 2008: 402–7). He will be advised initially that he must set the right kind of target. ‘What does that mean?’ enquires Mark. ‘They must be carefully calibrated,’ he is told, ‘so as to motivate your people to achieve the highest level of performance.’

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Next Mark asks: ‘How do I decide what the right level should be?’ Adviser: ‘Targets vary in level of difficulty. Targets are considered to be moderately difficult (or highly achievable) when they are set at the average level of performance for a given task.’ Mark seeks greater clarity. His kindly adviser complies: ‘Targets are classified as “tight” or “loose” or “easy”.’ Mark: ‘What do you mean by “tight”?’ ‘“Tight” is working at a consistently high level of effort.’ ‘So should I set tight targets?’ Adviser: ‘Yes, scientific studies prove that as the level of difficulty in achieving targets rises, so does motivation and performance.’ Mark nods: ‘So the harder the targets are to achieve, the better the results I will get?’ His adviser shifts uneasily in his chair. Mark is advised that he must exercise a degree of caution: ‘This can be a bit tricky. You see, there is an “undefined level at which targets will be impossible to achieve and as a result performance will decline dramatically”.’ Mark: ‘So I must not overdo it?’ Adviser: ‘Correct. You must bear in mind that the best level of performance may not be achievable.’ Mark: ‘So can you give me a bit of advice as to what level targets should be set that are achievable but not too easy?’ Adviser: ‘Unfortunately it is not possible to specify the optimal degree of difficulty for targets.’ Mark’s adviser, unaware that he is becoming increasingly confused, gives him a wink and says to him: ‘Let me give you a tip that you might find useful. To get the best results, set demanding targets with small adverse variances (in other words which will not be achievable).’ ‘What will I gain by this?’ asks Mark. Adviser: ‘An inability to meet some targets will be seen as “healthy”.’

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For Mark there is still one big question that needs an answer. Should he himself decide what his supervisors’ targets should be or should he invite them to participate in setting them? Adviser: ‘Participation has advantages, but participative methods should be used with care.’ ‘What are the risks?’ ‘Where the targetee has been involved in setting targets, it gives him the opportunity to negotiate lower targets that increase the chances of achievement. This is all the more risky if achievement brings a financial reward.’ At the end of this discussion few would blame Mark for concluding that in seeking counsel on how to set targets he would be well advised to look elsewhere? What the responses of the young manager’s imaginary adviser make clear is the importance of two assumptions:

• that, given the choice, a manager will opt for a target that is easy to achieve rather than one that is demanding; • that the effort invested by managers in getting work done will be determined solely by the level at which a target has been set. It is a mechanical process that elicits an automatic response (Drury: 405). The depth at which these assumptions are embedded indicates that at the roots of accounting doctrine is an ideology. Because this has a marked impact on performance measurement it calls for further consideration and is the subject of Chapter 4.

Setting Standards Targets and standards share common ground. If you are so minded, you can set a target that has to be matched or you can set a standard to be attained. In each case the central question is who sets it. In the previous chapters the focus was on shortcomings in accounting doctrine. However, on the question of standards the doctrine has much to its credit. It is prepared to confront issues that have been ducked by others – not least in the public sector. Having said this, it is important to recognise that the adherents of SAD have a professional stake in the concept of standards. For as the title by which their body of doctrine is known implies, the setting of standards is at its core. For business organisations a central question is at what level they should be set? The choice is often between the ideal and the attainable. The advantage of the attainable standard is that people are more likely to respond to the challenge of matching it because they see a reasonable prospect of succeeding. On the other hand, there is the drawback that the attainable level may be predicated on the assumption that the road to a higher standard is blocked by problems that are beyond the wit of man to resolve.

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The advantages of the ideal model are the converse – it can result in higher levels of achievement. However, for this to happen those in charge have to persuade their people both that the standard is the right one and that they have the capacity to reach it. A prime example of the consequence of setting standards that were attainable but proved to be too low was that of the downfall of the manufacture of television receivers in Europe. The manufacturers had adopted a quality standard that accepted a percentage of faults that proved to be much higher than that of their competitors in the Far East. To deal with these, they employed armies of service engineers to repair television sets as they developed faults. Eventually they woke up to the fact that their Japanese competitors were producing receivers that were virtually fault-free – at an incomparably higher standard than that they had settled for in pursuit of the attainable. The result was dramatic. European producers, including Philips, the electronics giant, were swept aside as their competitors collared the entire world market. It was only then that they came to realise that they had set their sights too low, but all too late. They threw in the towel. The story of the demise of the European television industry throws a sharp light on a characteristic of industry in the Western hemisphere – and this is nowhere more marked than in the UK. When a problem emerges and it proves difficult to resolve, the tendency is simply to shrug and declare it to be insoluble, walk away and learn to live with it (a characteristic explored more fully later). Any business chief who tries to do something to raise the standards within his organisation may feel he is walking a tightrope. On the one hand, he will not want his managers to throw their arms in the air complaining they are being asked to achieve the impossible. On the other hand, he may feel that unless standards are raised the business in his charge will go the same way as Europe’s television makers. The promoters of SAD are amongst the few who have taken this issue head on. However, their preferred solutions may not enthuse their mainstream colleagues. Their formula for setting standards runs parallel to that for the corporate plan. If the standard is not reached, the gap between that and the actual outcome has to be established and the cause pinpointed through the same elaborate, long-winded procedure – investigation, and the submission of a report and analysis (Drury 2008: 483–5). While there are many who will commend the promoters of SAD for facing up to the issues raised by standards, not everyone will appreciate the instrument they employ, which is a model that represents the ideal and which is part of the approach to the goal of efficiencies. They present two examples, both of which relate to the factory context (Drury 2008: 120, 420–3). One favoured model is designed to guide managers in working out a standard cost for materials. The other sets out a method for establishing a standard cost for people employed.

A Materials Model A materials model comprises six elements: 1. First, you need to establish what are the most suitable materials for the work to be

done.

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2. You write a specification that provides a precise definition of what is required. This

must conform to company policies on both design and quality. 3. The next step is to get a price from the procurement department. 4. The procurement department is required to conduct a trawl of all potential suppliers

to ensure that they secure the keenest price. 5. It is a further requirement that the supplier selected must offer the most favourable

credit terms and must have a satisfactory track record, both in terms of quality and delivery time. 6. Finally, when you have factored in all these elements, there must be an allowance for unavoidable waste. Clearly, for those managers involved, there will be a lot of work to be done in order to apply the model and questions as to how much time it will take. There is a further poser: because the model has to be applied in an environment in which unpredictable changes are a common occurrence, who will make the adjustments and decide how frequently this will have to be done? And what resources will be made available to do it? Further, because applying the model calls for the close cooperation of several departments, each with its own local agenda, how readily will this be forthcoming? Unless convincing answers can be found to these questions, the likelihood of its application is minimal. And this of course gives rise to doubts as to the value of the model.

Working Out the Cost of People Calculating the standard cost of using people is not quite as demanding as that for materials. The key is to establish how long it takes to get each job done. (This was easier to do when companies employed time and motion officials.) Armed with this information, you can now construct the model which needs to incorporate these elements: the time taken by an average worker to do the job. This calculation must be based on the assumption that work is done under the most efficient conditions and that all unnecessary effort is eliminated (another relic of the age of Taylor). An allowance should be made for disruption to the flow of work such as that caused by equipment failure. Having collected this data, feed it into the model and you have the number of standard hours required (Drury 2008: 421–3). As will be seen later, standard hours as a measure is badly flawed. The supporters of SAD have made a valuable contribution by flagging up issues about standards that have been widely ignored by others. However, the utility of the models they have constructed and presented in response to the issue of standards is open to question.

The Ideology Behind Standard Accounting Doctrine In many fields of endeavour, if you were to question a practitioner about any of the precepts in the corpus of professional theory that supports them in plying their trade, the response you are likely to hear is ‘Surely it must be obvious’. They will be surprised that

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it is not equally evident to you. When you hear these words or something similar you may be sure that beneath the surface there is an ideology, and ideologies have deep roots. An ideology will enshrine articles of faith and these of course will be impervious to reason. So it is with cost and management branches of accountancy. Doctrine has erected a sizeable and elaborate superstructure. At the ground level and above reasoning and logic prevail, which fits in neatly with the stereotype of the accountant’s concern with facts and figures. Some of the arguments and models may be open to criticism for being over elaborate – to the extent that mainstream managers have sometimes given up on them – but they are unlikely to attract censure for the reasoning that is applied. This does not extend to the subterranean level where the foundations are embedded. Here there has been a vacuum from which logic has been extracted and replaced by opinion and unchallenged assumptions. Assumptions about the way people behave are at two levels: explicit and implicit.

Explicit Assumptions These have already been reviewed:

• The way work should be done must be prescribed. • People must be closely supervised while they execute the work according to the methods which have been prescribed.

• To get the performance required, people must be set targets which will motivate them. Because the adherents of orthodox doctrine have absorbed the precepts associated with the command model, this has extended the portfolio of assumptions to which they subscribe: top-down, one-way communication and the expectation that orders will be obeyed.

Implicit Assumptions The imperative of method prescription and close supervision rests on the assumption that, without them, people will either not do work as well as it should be done or they will not work at all: for people are naturally indolent and incapable of determining the best way to get work done. People – in this case predominantly managers – will not perform adequately unless they have targets to match. You will not get satisfactory performance if they are given too much say in what the target should be, because if they are given such scope they will select a target that is easy to achieve. It is doctrine on the subject of targets that offers the closest insight into the perspective of its advocates into the way people behave.

Engineering Behaviour It is a fundamental belief that people can be manipulated to get them to behave in ways to suit your purpose. If you use the right instruments, you are assured, behaviour can be made predictable. This of course facilitates both planning and measurement. Hence the emphasis on the need to calibrate targets with precision. You decide the performance you

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require, set the target precisely, and you can count on getting the result expected. If this is not forthcoming, it cannot be the target that is at fault: blame must be laid at the door of the individual. And, doctrine reminds you, penalties should be applied. The evolution of orthodox accounting doctrine coincided with the development of a theory of human behaviour that is widely associated with the pioneering work of the Russian scientist, Ivan Pavlov. It was during this time – the early 1900s – that he conducted his renowned experiments (liberally funded by the Russian leader Lenin, who clearly spotted its political potential), in which a salivating dog responded to the rattling of a plate. The results of Pavlov’s work gave added strength to the argument that people could be manipulated in all walks of life – and work. Because of the widespread interest shown in the results of Pavlov’s experimental work, it seems unlikely that it escaped the notice of those early pioneers who were developing accounting doctrine in the industrial environment of the early twentieth century. Such are the principal components of the ideology that underpins orthodox accounting practice. They are based on assumptions that are contentious and impossible to prove. In recent years some promoters of doctrine have worked hard to elevate its status by seeking to persuade critics that it is bolstered by the results of scientific research. However, many of the studies that have been conducted have been directed at peripheral issues. This is no substitute for the more urgent task of taking a fresh look at assumptions that have gone unchallenged amongst the custodians of doctrine for the best part of a century. There other questions that need to be addressed, not least the extent of the gap that separates theory from practice. This is the subject of Chapter 3.

An Unexplored Dimension Over recent years an issue that has attracted mounting interest both amongst practising managers and academics has been that of inertia. It is a condition that is a product of apathy: it can cause something that has been described as sclerosis in the organisation which deprives it of the capacity to respond to external events. The results of inertia itself cannot be measured but, as will be shown later, its consequences often can be. When academic prominence was accorded to this issue, in this instance by Gordon Lippit in his book Organisational Renewal (1969), it saw the launch of yet another prescription in the shape of ‘organisation development’ (or OD). Its essence was to involve people in a programme designed to eradicate inertia. There have been few documented success stories in the application of this formula, which did not recognise the need to measure its impact on performance. To find the answer to the question why there has been so little success in reducing inertia you do not have to travel far. The scale of the problem has generally been underestimated. Secondly, the consequences of inertia have rarely been measured.

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Rank and Order Hierarchy is the other face of the chain of command. The most deeply embedded idea in the hierarchy is that of order. Jobs are positioned in rank order. Rank order is the source of status and protocol. Breaches of these are deemed to be ‘out of order’. The imposition of penalties may follow. Because the central element in command is rank order, people are imbued with the belief that what you may do, say or suggest is determined by where your perch is positioned.

Accentuating the Negative The overall effect of all this is to impose constraints. It puts a premium not on what you can do but on what you can’t. Of the criticisms that can be made of the Urwick model it is this outcome that is potentially the most damaging. There are few who work in business organisations who will dispute this conclusion. To reach a lasting solution to this intractable issue, two things must first be done: 1. The scale of the challenge must be recognised; 2. Performance measurement must be deployed to flag up the costs of leaving the issue

unaddressed. As already noted, there are other shortcomings in the command concept. These are the need for the close supervision of work and the assumption that all instructions issued will be obeyed.

The Cost of Watching People Work Close supervision is the costly activity of watching people as they work. As already observed, ensuring that instructions are obeyed is the essence of the idea of control. However, this requirement – strongly endorsed by SAD – creates the need for an apparatus to keep regular checks on what is being done. The closer the supervision, the higher the cost. It may come as a surprise that the costs of supervision attract scant attention in accounting textbooks.

Yours Truly, Disobedient Servant As has been noted, a fundamental precept of the command model is that people will obey orders. The widely held assumption that there is no alternative model can make the job of manager attractive to the simpleton who concludes that being a manager requires no more than to bark orders and demand obedience. This assumption is common in the UK and this approach to the task has had many adherents in the USA, where it has been accorded a title – ‘confrontational management’. The confrontational manager typically picks a fight with the workpeople in his charge. As will be shown shortly, it is a fight the manager cannot win. However, they will not be

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the only loser, and the biggest loser is the organisation itself. To employ individuals with these attributes can be expensive, as the experience of Pragma Foods clearly shows. Here, Gus was Group Manufacturing Manager. Until a few years previously, most of the company’s plants were located in East Anglia and north-east England. Pragma’s snacks division had not been performing well for some time. Now, as part of a major marketing initiative, it was decided to increase the manufacture of one product – a snack presented in a small packet – by 20 per cent, and the company concluded a deal with a tobacco firm to include within each packet a card displaying a photograph of a prominent sportsperson. For the company a lot was riding on this new venture. To increase production capacity the decision was taken to close its plant in East Anglia, making all who worked there redundant, and to move several machines to the northern site. Those working at the plant learned of this decision through their local newspaper. The planned transfer became the responsibility of Gus. He instructed the engineering tradesmen at the doomed factory to prepare the equipment for the move. A terse notice pinned to a noticeboard added, ‘Production workers will give their colleagues every assistance.’ The machines duly arrived at the northern site. The plan depended on these machines being brought into production within 10 days. However, when the factory’s engineering staff set about installing the machines, they found that key parts had been damaged or were missing. The workpeople at the East Anglian site had not stood idly by during their last days of employment there. I witnessed only the initial events that followed. All the others were observed by my colleague, Brian, with whom I worked for 12 years, and who was engaged on an assignment at the plant during that time. The news of the damage to the equipment was the trigger for frenzied activity. Damage had to be repaired. Missing parts had to be ordered, delivered and then fitted. You had the unusual spectacle of tradesmen fitting and adjusting moving parts, which, of course, is strictly illegal.

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3 Measures in Practice

Introduction Chapter 2 looked at the principles of standard accounting doctrine and the objectives it seeks to match. The purpose of Chapter 3 is to assess the theory in action.

How Budgets and Targets are Set Budgets As noted in Chapter 2, the budget is at the centre of standard accounting doctrine (SAD). In textbook terms setting the annual budget is an orderly process, governed by sweet reason and courteous compromise. The reality can be different. Within the business environment the announcement of the date by which departmental bids for money should be ready is a signal for the start of a scramble. The activity of preparing departmental bids takes over: managers tend to become inaccessible, there are seemingly endless rounds of meetings and bid preparation often absorbs a huge amount of time. The previous chapters took a look at two of the aims of accounting practice: (1) putting a plan into practice and (2) exercising control to ensure that this is properly done. The corporate budget is at the centre of this process. At its most basic the function of a corporate budget is to distribute funds to each part of the organisation to enable it to get its work done. Hence the priority accorded to preparing a department’s bid for funds.

The Corporate Scramble Each department has to apply for the money it calculates it will need for the coming 12-month period. Because what is available is from one single source, competition is always keen. In most organisations putting the company budget together is usually an annual event. Each manager in charge of a budget prepares to make their bid for funds which usually requires the submission of a formal proposal. It is sometimes followed by an appearance by the bidder before one or more senior officials to present their case. If you are unlucky, your submission will be heard by the finance director or an aide, sitting alone. You will be more fortunate if your case is heard by a panel at which the finance chief is flanked by other senior executives, who can bring to bear a more balanced and secular view.

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A Lesson on How to Bid I learned about the process of submitting a bid for funds the hard way (there is probably no other way to do it), but much of the pain was alleviated by my colleague, Andy. When I was appointed head of a department I learned that the position was ennobled by the august title of ‘budget controller’. (In many businesses it is only a small minority of managers who have the distinction of responsibility for a budget.) The timing of my appointment gave me no more than a few weeks to prepare my first application for funds. Andy was a battle-hardened warrior who had survived many internal conflicts. Sensing my apprehension, he took me under his wing. As he sat down beside me at the large office table that went with my job, his preamble commenced. ‘Dave, there are two things you have to know,’ he began. I made it clear that I was all ears. ‘You know what the budget allocation for your department was for last year?’ ‘Yes.’ ‘The first rule is this: regardless of what you actually need during this next financial year, last year’s figure must be the very minimum for your bid. Your priority task is to think up convincing reasons why you will need that figure or, preferably, one that is higher.’ This advice I found disturbing. ‘But I have already worked out that this year I will not need quite as much as last year.’ ‘Makes no difference,’ came the reply. ‘You must never, never ask for less than you were allocated for the year that is now ending.’ Andy gave me his reasons. He made clear the risks I might run if I was allocated less money than for the current year. ‘OK,’ he continued, ‘let’s suppose you put in a bid for less money. It will of course be accepted with alacrity. But what if the year after next your departmental workload increases and so you will need more? If that were to happen – and past experience of your little empire suggests that it is likely – you will have to fight tooth and claw even to get back to where you are now. And remember, there is every chance you may lose that battle.’ He could see that the gist of his message was registering. ‘Yes, you’ve got it. If that is the way things go, you will be allocated less money than is needed for your department to get the job done.’

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Andy went on: ‘Look Dave, in this firm, like any other, you have to look after your own interests. Nobody else will.’ He reminded me that the size of the department budget was a factor in determining the ranking of my position in the corporate salary bands. ‘There is something else you should bear in mind,’ he continued. ‘A reduced budget often creates a perception that your department has dropped in the pecking order: this can affect the morale of your staff. You may find it harder to attract good people. And as for other department managers, if you apply for a reduced budget figure they will regard you as a basket case.’ Andy was looking at me closely to assess the effects of his lesson so far. ‘You’re looking a bit shell-shocked, Dave but I don’t want to see you lose out.’ ‘Now here is the final lesson,’ he continued, ‘and it’s Catch 22. Assume that towards the end of the financial year the conscientious husbandry of your funds is rewarded by a residue of unspent money. Do not expect a pat on the back. A rap across the knuckles is more likely. The rules of the game will tell you that you are at fault for making an incorrect forecast in the first place. You overestimated what was required. You have managed on less. Hence the funds available for the coming year will at best be at the level you have actually disbursed, regardless of what you will need. In other words, your budget will be chopped.’ As he got up and headed for the door, he turned and added one final word: ‘Remember, Dave, honesty and budgets do not mix. You’ll do OK as long as you remember that it’s all a game.’ A few weeks later, armed with Andy’s advice, I made my presentation to a subcommittee of the company board (fortunately the managing director was in the chair with the head of finance sitting beside him). Andy had told me that not only should I ask for more than I needed, I should add in ‘a bit more than you need’, as they were sure to make a token cut in the total amount for which I was bidding. Sure enough, they sliced off the extra bit, leaving me with the substance of my bid. Later that day, passing the managing director in the corridor, he made some complimentary remarks about my presentation. I found myself wondering whether he too shared Andy’s view that the allocation of the company’s money was ‘just a game’.

Lessons to be Learned I was soon to learn that the advice wrapped up in Andy’s kindly homily was sound. He had warned me of the pitfalls that could trip up anyone who was applying for funds and who had not already learned the rules of the game. Later, working as a consultant, I found that the same potential traps were embedded in the procedures that governed an application for funds in many other companies. Now, as has already been noted, it is fundamental to accounting doctrine that the content of the budget is the sole source from which targets can be fashioned. It must be

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clear by now that the imperfections in the practices routinely employed in the allocation of funds make the advantages of this course of action less apparent. Take an imaginary case. You propose to set up a new system in your department and have carefully estimated the cost at £20K. After money has been allocated but before work starts, a member of your staff suggests an alternative method of getting the work done which would cost £4K less. What do you do? If you go for the cheaper option and save the company £4K, what will be the outcome? Will you get plaudits or will your knuckles get rapped for not adequately doing your homework in preparing your original estimate? Probably the latter – evidence enough that the budget is not a suitable instrument for setting targets. Its inflexibility risks stifling innovation and thereby reinforces the inertia that is already present. The unsuitability of the corporate budget as a source of targets is plain, but in reality there is no risk of this piece doctrine being applied.

Targets Constraints at the Top Over the past few decades life has got much tougher at the top of British listed companies. The average tenure of chief executives has dropped to three-and-a-half years. For a long time the biggest shareholders in large UK companies which include pension funds and investment banks were loath to interfere unless their performance declined to a level at which it could no longer be ignored. The picture has changed out of recognition in the wake of the huge expansion in the number and scale of acquisitions and the increased prominence of ‘activist’ funds. The cheerleaders of this increase in aggressive corporate behaviour have been City ‘analysts’ and broadsheet journalists who have clamoured for boards to commit themselves to the achievement of ‘ambitious’ and ‘challenging’ targets. As a result, it is nowadays rarely enough for a board to announce that they are going for growth; they will be pressed to put figures on this policy. Short of engineering an exit from the stock market – a course of action taken by both Richard Branson and Philip Green, the high street retailer – few business chiefs can insulate themselves and their companies from such influences. They have to consider with care what they can make public. As a result, they may decide on a foxy tactic, applying the art of what has come to be called ‘managing expectations’. This means forecasting a lower profit than they actually expect to make. By so doing they trade the risk of brickbats now as a result of a ‘disappointing’ forecast for the likelihood of plaudits when the actual results are reported as being ‘at the top end of expectations’. However, this is a tricky game. For example recently Britain’s biggest food maker, Premier Foods, produced a trading update which forecast that profits for the year would be within the forecast range. This was judged by analysts as City code for less than previous estimates had predicted. No wonder company boards agonise over their choice of words. The downside of these practices is that inevitably they risk diverting the attention of those at the top from issues that really matter to the future of any business, such as how much capital to spend on equipment and where. There is another hazard – a risk that a board succumbs to City clamour and commits the company to deliver ambitious results, such as ‘double-digit growth’, without any

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grounds for certainty that these targets are attainable. Eagerness on the part of top managers to find City favour has been a contributory factor in the demise of some previously prosperous companies. Board commitment to ambitious targets has obvious consequences for company managers: how best to elicit the collective effort that will be needed to match the promises that have been made. A glimpse of the pressures that are exerted at corporate level makes it possible to put the dictates of accounting theory into perspective. In practice the budget is not a rich source of the material on which to draw in constructing targets – the reality is that their source lies in the expectation of City analysts.

Motivation, Coordination and Planning As has been reported, the exponents of standard accounting doctrine are confident that they have the answer to the riddle of how to motivate people. You extract targets from the corporate budget and calibrate them with precision in order to get the performance you require, and you tell managers they must be achieved (Drury 2008). Set the targets at the right level and performance is as good as guaranteed. And of course performance can be measured – it is a formula that has the virtue being easy to grasp. However, as has been made clear, when it comes to applying this recipe flaws begin to surface. For a start, in practice targets are not set this way.

The Remaining Goals: Motivation, Coordination and Planning It is a cardinal precept of accounting doctrine that the annual corporate budget has the power to motivate and coordinate – and of course to formulate the plan and oversee its implementation. The purpose of what follows is to show that in all these three respects the reality is infinitely more complex and that if these goals are achievable the instruments lie outside the narrow formula that is prescribed by doctrine.

Motivation Motivation Targets Versus Leadership As has been reported, the custodians of standard accounting doctrine will have you believe that motivation is a simple matter. Get the target right and motivation is automatic: target = motivation = performance. This notion that targets alone had the power to motivate went unchallenged for many years. It was economic forces that first rocked this piece of dogma. At the end of the Second World War business chiefs were facing a situation that was outside their previous experience. For the first time ever in peacetime, vacant jobs outnumbered the people available to fill them. There were the earliest mutterings about skill shortages. Trade unions had emerged from the war with added power. Business chiefs recognised that there had to be new ideas.

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‘Everybody can be a Leader’ Leadership for all was an idea that filled the vacuum created by the displacement of long-established ideas. As a result, leadership training, mainly for supervisors, was widely seen as the answer. Later, it was extended to managers. There followed an explosion in the provision of training courses designed to develop the leadership skills considered necessary to motivate people. With this aim in view, employers sent many thousands of their staff on training courses. Support for this idea was sustained for several decades. The cost has never been counted, but the total investment ran into millions, yet few firms tried to measure the results in terms of improved performance. However, there were reasons why this training could not match expectations. It is natural that a supervisor who has been encouraged by exposure to this form of training to ‘act more like a leader’ will return to their job and try to make some changes for the better – however modest. The difficulty they will face is that while their attitude to their tasks may have changed, they will be returning to an unchanged environment where their interest in making changes for the better is not shared. As a result they will be acting in isolation and it is unlikely that their efforts will attract support.

How Initiative can be Blocked The company for which I was working had invested heavily in leadership training for its supervisors and managers. Will was the manager of a small laboratory at a factory in East London which made products from rubber, including conveyor belts and escalator handrails. A key factor was the quality specification for the basic materials, called rubber compounds, used to make the finished product. Will reported to Harry, the group technical manager, who was based at a group site in Lancashire. Will took part in a leadership training course. Unbeknown to his colleagues, myself included, he had long nursed the conviction that there were faults in the recipes he was expected to issue to manufacturing departments. The experience of the training course convinced him that he should at last summon up the courage of his convictions. He changed some of the recipes, informing Harry of his action. On receiving the message, Harry angrily summoned Will to appear before him. He was to reinstate the recipes he had changed and was not permitted to explain the reasons for his action. It was made plain that failure to carry out Harry’s instructions would curtail his career with the company. Will felt crushed by this mistreatment. He left the company a few months later, making the reason for his departure quite clear. So the result of Will having attended a training course designed to raise levels of motivation was that his efforts to display initiative – commonly seen as a leadership attribute – were thwarted, and the company lost a valued manager. This story had a sequel. Several months later, entirely by chance, as part of a project I was conducting in another factory within the group, I found that in some production departments the recipes handed out by Harry’s henchmen (and similar to those issued by Will), were being routinely ignored by operatives. This practice affected the project on which I was engaged. I went to Harry and confronted him with this fact, pointing out that this was apparently a contributory factor in current quality problems with some products. I suggested that there might be a case for taking a fresh look at some of the formulae in question. Harry airily dismissed my observations.

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I told him I would send him a copy of a short report with my recommendations that I had to submit, inviting him for his comments. It was clear that he was not taking my request seriously. However, after he had received my report in draft inviting him to respond before I submitted it to my boss, who was the chief executive, I received a telephone call from him requesting an urgent meeting. The result was his grudging agreement to the recommendations. The recipes were changed – the measure that had been championed by Will. The moral of this story is plain. As a result of taking part in a training course designed to develop leadership skill, Will tried to improve the contribution of his department. Had he been successful there would have been an outcome that might have been measurable, but because his efforts were blocked this did not happen. Subsequent events proved that the changes he tried to make were the right ones and that it was his way of trying to further the corporate objective – albeit on a modest scale. It is a matter of regret that the leadership training path to motivation has as yet been unable to demonstrate any substantial measurable improvements in performance. Yet business chiefs who like to be known for their hard-nosed approach and their tight grip on the corporate purse strings are prepared to continue to invest in a product that provides no measurable return.

Coexistence Nowadays motivation through leadership and that in response to targets live side by side. The results of training remain unmeasurable. Those that are target-driven are measurable but, for the reasons which have been examined, the value of the results that are reported is at best speculative.

The Educational Dimension There are some in the world of business and industrial education who argue that educational achievement has a place in the measurement of individual performance. There are of course qualifications that are designed both for supervisors and managers and it is true that qualifications are easily counted (a factor of importance in the public sector where governments set targets). However, it needs to be recognised that having a qualification is a mark of educational achievement. It has no relevance to performance at work – a fact that is obvious but which is often overlooked. Some employers restrict entry to positions above a defined level to those who have a university qualification. This rests on the implicit assumption that, without this, satisfactory performance will not be forthcoming. Some business schools have sought to establish a link between possession of an MBA and the performance of former students when they have found employment. However, the single link established has been in terms of initial salary or of subsequent salary progression. For business schools this is sufficient, because it is information that can be used to enhance their attractions in a competitive market place. Overall, it is possible that having an educational qualification may assist a supervisor or manager to reach a higher level of personal performance, but it questionable whether convincing evidence can be adduced to prove a link between the two.

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Coordination: Measuring the Results of the Wrong Goals The advocates of SAD have been slow to grasp the scale of the challenge set by the need for coordination – to pull together the disparate segments of an organisation. As observed, it has been seen as a routine task that requires no more than a bit of horse trading when the time for putting the corporate budget together comes round. Steven, the marketing director of Hi-wire, would be unlikely to agree that life was that simple. Hi-wire International, a US-owned multinational, produces pieces of military communication hardware. Severe disruption in the manufacturing process was an everyday occurrence and the way that these events were handled was summed up in the factory watchword, ‘Four more screws and it’s out.’ One such crisis may help to convey the flavour. Several thousand boxes were produced to the wrong dimensions. As a result, lids built for each radio receiver did not fit. The problem was reported to Rod, the manufacturing chief. Back came the reply: ‘Fix the lids to the boxes.’ Amongst the workpeople there was consternation. They pointed out the obvious: hammering the lids on to the receivers would wreck the delicate crystals inside. So once again, through their supervisors, they sought clarification. ‘Do you really mean we are to hammer on the lids?’ Back came the order ‘Fit the lids, regardless. If this damages the receivers, so be it. That will be a problem for Sales.’ Now, when it came to measuring Rod’s performance in matching his production targets it is likely that he could bask in the warm glow of apparent achievement. In reality the results recorded by his local measures were worthless. By risking serious damage to the company’s relationship with its biggest customer he had undermined its ability to achieve the corporate goal of maximum profit. In the case of Hi-wire it was manufacture that was permitted to exercise excessive power. Power can be grabbed, however, by any of the major functions. Often it is the technical department that calls the shots. In the notorious case of Rolls Royce Aero Engines it was the boffins who were allowed to build an engine for which there was inadequate demand at the time.

The Organisation as Centrifuge The primary reason why coordination is hard to achieve is that in many organisations there are powerful centrifugal forces at work. They exert something akin to gravitational pull, dragging segments in all directions away from the centre, and the consequences are invariably damaging. Because local objectives displace the central goal the results that are measured – and which often attract rewards – are the wrong ones because they reduce the corporate capacity to achieve the only goal that matters.

Local Gain Equals Corporate Loss The misuse of position to further local objectives is not always as intemperate and brash as in the case of Rod at Hi-wire. It is much more common in the shape of stratagems designed to make the results of one department look good at the expense of another.

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These more subtle tactics are usually deployed over a longer period of time, but the results are just as perverse. Such was the case of Akwa Water Services (AWS), which, as its name suggests, provides water services to the public. A key function in meeting this requirement is engineering, which is charged with operating and keeping in good shape the firm’s water-treatment plants. The damage done to public health at Camelford in Cornwall, shortly after the water industry was privatised, demonstrated the consequences of any serious lapse. At AWS it was Harold, the head of the procurement department, who over a long period of time had accumulated a measure of power far beyond that normally associated with that function. This made life hard for Rex, the engineering manager. His primary task was to ensure that Akwa’s plant worked efficiently to provide good-quality water and adequate waste treatment for homes and businesses in the region. This should have been sufficient to make him a key player – but in fact he was not. To achieve his purpose, Rex needed the best equipment for the job. Within the targets of procurement there were some ambiguities. Yes, the objective was to buy the best equipment for the job but at minimum cost (another case of clashing goals). Harold’s true fixation was with cost. In any water-treatment plant these days a key piece of equipment is a box containing a computer which is linked with machines and controls the process. In order to match his objective the engineering manager sought authorisation to buy the equipment that was reliable and easy to maintain. Moreover, in pursuit of his aim to increase efficiency, his plan was to standardise the equipment that controlled the process. As each piece of kit wore out and had to be taken out of service, it was his aim to replace it with Unikit controls. But his plan was blocked by Harold. Whenever the time came for an old piece of equipment to be replaced, he applied his policy of going for whatever was the ‘best deal’ (that is, the cheapest option) at the time. As a result of Harold’s policy, over a period of twelve years six different sets of controls, each the product of a different manufacturer, were installed. The pennies made by buying the cheapest available were dwarfed by the extra costs in maintaining this wide spread of different controls. For instead of having to carry one set of spare parts, which would have been a benefit of standardisation, Rex had to bear the costs of six. There was an additional source of cost. Wherever computerised controls are used – which nowadays is in most firms in which materials and liquids are processed – engineers have to be trained in how to handle them. Training is provided by each manufacturer and it seldom comes cheap. Instead of having all his staff trained on Unikit, Rex had to shoulder the costs of training for six different systems. There was yet a further complication for Rex. Because the company had recently introduced a new regime – driven by the finance department – that imposed strict rules limiting the number and value of spare parts to be held in readiness, there were occasions when a spare set of controls was not available when a system failed. Whenever this happened, these had to be bought in at once and at premium prices. Rex was friendly with Les, his counterpart at another water supplier, which, unlike AWS, had made a policy of standardising on Unikit. Both firms were of similar size, as were the two engineering departments. The two men made a rough comparison of the costs of running their departments, and costs at AWS were some 20 per cent higher. Rex asked Les to send him some figures.

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Rex now had enough ammunition to make a case for an assault on the policy of the procurement fortress. He had enough to prove conclusively that the result of its focus on local objectives was to make the engineering function far more costly to run than was necessary. Now he had the figures. It would be nice to report that Rex won a victory. It did not happen. There were two reasons. In the first place, Rex was well aware that for years Harold had called the shots and the chief executive, who had formerly been the finance director, thought highly of Harold. The second reason was this. Rex had started his career at AWS as a humble electrical tradesman. He had slowly risen through the ranks to reach the top position. He was often heard to say ‘I’m only an engineer’, to which he was in the habit of adding, ‘I’m not good with figures’. However, things eventually did change. Following a spell of ill health Rex took early retirement. His successor was Eddie, a younger man. Eddie was ambitious and quick to learn. Shortly after his arrival it was time to replace an ageing machine. A meeting was arranged. Eddie sat alone on one side of the table. Facing him were Harold and two of his aides. Eddie put forward a proposal requesting the purchase of Unikit equipment as part of a plan for standardisation. Harold of course turned it down. But Eddie had carefully prepared the ground. Taking the figures painstakingly collected by Rex he produced data that showed just how much money could be saved by standardising the equipment. The sum was substantial. This was not what Harold was expecting. He was faced now by a confident and determined young man who was clearly at home with performance figures. Harold asked for more time to consider the figures. Eddie would have none of it. He invited Harold there and then to pick holes in his case. It was clear that the argument was incontrovertible. Slowly it began to dawn on Harold that the game was up. He and his little empire were being cut down to size. It was no longer departmental goals that were in the ascendant but those of the corporation as a whole. The organisation itself was the winner. What the case at AWS made plain was that while orthodox accounting practice is not well-equipped to deal with the dilemmas created by divergent goals, the use of performance data can achieve this purpose. As will be seen shortly, the roots of the problem caused by the forces that drive parts of the organisation in different directions are too deep to be eradicated by efforts on the part of the likes of Eddie. But where the pursuit of local objectives threatens the corporate interest, the most effective means of reining in such parochial aspirations is the deployment of data. You may have to dig for it, but it is always there.

The Trouble with Planning In the universe of SAD everything revolves around the corporate plan. So long as you keep a handle on any deviation from the plan you have control. As anyone who has experience of running an organisation knows, the reality is more complex.

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Changing the Goalposts Brian works for a company that builds aircraft. He is head of a department that tests key components and was explaining some of the dilemmas he routinely encountered in planning the work of his department. There were problems with the company plan for completing an order for military aircraft. ‘It was originally stated as part of the initial programme announcement that the aircraft would be completed by July this year. Nobody was daft enough to take that date seriously. A few months later we were told that the completion date was being put back to April next year. But by now nobody at any level even pretends that this date can be met. Yet officially it remains the target date. Then recently the word gets around that one of the divisional chiefs casually mentioned during the course of a meeting that the projected completion date is the following November.’ I asked Brian the obvious question. In the face of this constant uncertainty, how did he plan from week to week? Brian shrugged. ‘As you can tell from what I have told you, when it comes to the company programme you might as well read the stars. At my level the way I plan is by guess and by God. In practical terms my main objective is to minimise the risks by avoiding making decisions that will box me in so that I can react when the goalposts change yet again.’ Not every manager has to cope with such harsh dilemmas in planning the work of their departments, but few find it an easy task. Planning is a set of imperfect techniques that are deployed in an imperfect world. Brian’s company is not unusual in having a plan that is dogged by uncertainty.

Planning at Local Level A common cause of disruption in the process flow is the inadequacy of short-term planning. The results of these shortcomings are not always adequately measured.

The Man in the Planning Room A common cause of many of the difficulties experienced with planning at all levels – including the local – can be traced back to Taylor. As remarked earlier, one of his fundamental precepts was to split the planning of work from its execution. This was expanded into, first, the appointment of an official to do the planning (the man in the planning room), and then the establishment of a whole department – staffed with planners – charged with this function. It was central to Taylor’s doctrine that planners be experts and that only they can fulfil this function. In practice they sometimes have insufficient knowledge of the work to be done to do what is required. The following is an account of a conversation that took place at one of the factories of Vauxhall Motors, the British subsidiary of General Motors of the United States, and reported in Management Today (1982). A member of the planning department was explaining to Jack Lee, a workman, the changes that he and his colleagues were about to make.

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Planner: ‘It will be done the week after next. We will split the feed’ (a device for conveying material into a machine). Workman: ‘How will you get the material in?’ Planner: (pointing) ‘Through here.’ Workman: ‘Too small.’ Planner: (getting out his rule to check) ‘Really?’ Workman: ‘Just two inches too small.’ Planner: (walking away) ‘Incredible.’ The workman adds that he never saw the planner again. Such chance conversations cannot be relied on to avert disasters. The same workman recalls how he and his workmates came into work on a Monday morning to find that the entire layout of the workshop had been changed over the weekend. ‘One look at this gadgetry,’ he recalls, ‘was enough to tell us that this would not work. We had ourselves seriously considered the same idea earlier and concluded that it was unworkable. As soon as we ran a full flow of work through it, it jammed solid. It took three days to clear it; a further two to restore the previous layout. We were of course in enforced idleness during this time.’ The results of this piece of planning were eminently measurable, of course. It will come as no surprise that no such measurement was made as every effort was made by the planning department to cover its tracks.

Playing Fast and Loose with Day-to-day Planning The segregation of planning from execution is a source of a much wider span of disruption to the process of making things and getting them to the customer. There is a lot to be learned from surveying some planning practices commonly employed across the engineering industry and which have adverse effects on performance (Goldratt and Cox 2004). Goldratt and Cox illustrate graphically how things can go badly wrong with the process. All these have a major impact on performance and its measurement. Where firms frequently deliver late (that is, after the date promised) planners are often tempted to release materials from which products will be made before they can be used. This is done in an effort to catch up. In fact such calculations rarely work in practice for reasons that should be clear shortly. Running close behind the desire to catch up comes the aspiration to ‘get ahead’: ‘If we issue these materials early,’ they reason, ‘we will get the product made early and this will give us some breathing space.’ Sounds reasonable, you may say, but no, it proves to be another miscalculation. This anticipated advantage rarely appears. The effect of both assumptions is to clog the process with materials that arrive too early to be used. All this adds unnecessary costs, an outcome considered in the next chapter.

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The Hidden Costs of Flawed Planning Costly Convictions It was a purpose of the previous chapter to show how in the factory context bad planning practices can reduce efficiency by leaving the process clogged with material. The aim of the next few pages is to show how irrational beliefs can cause further disruption to the process and thereby add to costs, all of which are measurable – and avoidable. There are managers who harbour a visceral aversion to the sight of a workman with nothing to do. As a result they are apt to put him to work making something without regard to how it fits into the existing production programme or whether it is required by a customer in the near future. This piece of raw prejudice is ennobled by the accounting term ‘labour utilisation’ and is a constituent of the concept of ‘standard hours’ (Drury 2008: 421–3). The other piece of dogma running parallel with keeping workmen busy rules that machines should be kept working for the maximum amount of time available. The implicit assumption that underpins this belief – that everything that is made will find a ready customer – is rarely questioned, or even discussed, although experience shows it is often not the case. Such are the hazards of unquestioning reliance on an untested assumption. The principle of maximum machine utilisation can have other malign consequences. lt is of course part of the concept of efficiencies, which in turn is at the centre of standard accounting doctrine. As has been seen, the uncritical application of this principle on its own can be hazardous enough. However, add a touch of raw prejudice (never leave a workman idle) and the practice of side-stepping the plan by premature release of materials and you have a dangerous amalgam which can play havoc with the manufacturing process. As will be seen shortly, unintentionally you will have applied a recipe the effect of which is to maximise the waste of resources. It may also have undermined the confidence of customers in your capacity to deliver.

Why Control Remains out of Reach With the process clogged as a result of a mix of dogma and irrational beliefs, it is time to take a look at what happens when materials exit the manufacturing process as a finished product. If a product has been made in order to keep a workman busy it is unlikely to have a customer waiting, ready to part with their money. With no buyer in sight, it will be added to a mountain of items that are already there for the same reason. This of course pushes costs into a steep climb. As with other consequences of overloading the manufacturing process, the costs can be pinned down and measured but once again, this is not always done.

Needles in a Haystack There can be further unwelcome consequences. Amongst the hundreds of items in the pile there will be several that are required now. They have already been made but they are needles in a haystack. The customer is on the phone demanding to know when he can

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expect it. Typically, people will spend a lot of time physically searching for the missing item – another source of unrecorded cost. There may be one final twist in this story. It is no longer a customer chasing an existing order. This time it is another customer but he wants to place a new order. He wants it yesterday and to get the priority required be is prepared to pay over the odds, but the machines may have been set up and are churning out products for which there are as yet no buyers. To reset a machine is often a costly activity – if you are making blades for aircraft engines it can take two days.

A Misplaced Faith in Computers Faced with the dilemmas caused by disruption to the process on this scale, there are business chiefs who like to think that IT will ride to the rescue. Suppliers of IT systems are unlikely to dampen such expectations. There is a pile of evidence to show that investment in such systems has often failed to match the claims of suppliers or the expectations of clients.

Kanbanas Cure For several decades managers have shown a keen interest in a method of organising the process flow so as to avert the consequences of bad planning practices which are the subject of this and the previous chapter. The system is known as ‘kanban’ or ‘just in time’. There can be no doubt that this has proved successful for some Japanese manufacturers, notably Toyota and Honda. Amongst British and American firms which have sought to emulate these Japanese exemplars, the limited evidence available indicates that there have been few successes. My colleagues and I have between us worked in a dozen companies which were claiming to be ‘doing kanban’ but which on closer inspection were nowhere near achieving this aim.

In Search of the Missing Order In many companies the reality is far removed from the hype. When I visit Clive, the production manager of a firm making a specialised type of door, he is seldom to be found in his office. Past experience has taught me where I will find him: out on the factory floor where he is scratching his head, a wad of orders in his hand, searching through a pile of doors, some of which are complete and others that are in different stages of assembly. He will be hunting an item that is urgently required as a result of a message from an impatient customer. The company’s computer system provides him with a huge volume of data, but it will not tell him where the customer’s door is to be found. Clive knows perfectly well that this is not the way he should be spending his time. He reckons that it takes more than 10 per cent of his working day. Take that percentage of his salary and you have an identifiable cost. What cannot be so easily measured, of course, is the cost of neglecting tasks left undone as a result of mis-spending his time.

The Cost of the Absent Customer There is another measurable cost to the production of items for which there is as yet no identifiable customer. This accumulation of items that clutters a large area in a workshop

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is classified as work in progress – products that are not complete – or as finished goods that remain unsold. So you are left with a stack of items – ‘inventory’ in accounting jargon. What may come as a surprise to some is that doctrine insists on recording this pile as an asset. Why? Because even if they have been there for ages, you are told they have sales potential (Drury 2008). Try telling that to the likes of Clive as he rummages through a stack of inventory in an unproductive search for the elusive item and with the voice of an irate customer still ringing in his ears. The reality is sometimes grimmer. It is a taboo subject in some companies – there will be a lot more cost if, perish the thought, a customer cannot be found – which as noted has been a common event in the American motor car industry. As a result, the product has to be sold at a discounted price, and if this does not cover the cost of making the car you have waste on a massive scale.

Conclusion The conclusion that can be drawn from the issues considered in this and the previous chapter is this: the planning model enshrined in SAD is not sufficient to accommodate the difficulties encountered in putting plans into practice. These problems are the result of a confluence of ideology (the separation of planning from execution), sloppy practice (the premature release of materials) and prejudice aided and abetted by doctrine (the maximum utilisation of people and machines). The contribution of each of these elements is measurable. However, effort to put plans into action may also be severely impaired if they do not take account of a powerful force that is at work in every organisation. This is the operation of the process chain, which is the subject of Chapter 4.

Conclusion By now the size of the gap that separates the formulae of accounting theory from the way that its objectives are accomplished in practice must be apparent. It has also been an aim of this section to set out alternative methods that are employed but which achieve limited success. These support the conclusion that while all the objectives set by SAD are the right ones the scale of the difficulties it confronts is often underestimated. This has implications for the measurement of performance: in terms of measurement, the orthodox view of the place of the budget has two shortcomings – it is accredited with the power to attain a portfolio of objectives that are beyond the capacity of this or any other single administrative device to deliver. The gap that separates theory from practice in the formulation and administration of the budget is such that it reduces its value as an instrument for measurement. Moreover it sometimes encourages wasteful practices, the cost of which often goes uncalculated. Because in practice targets are set in ways other than those prescribed by standard practice, other arrangements need to be made to measure the extent of their achievement.

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4 Measurement of Performance

Introduction The purpose of Chapter 4 is to survey the measurement of performance within the context of the process chain. We begin with a reminder that without a process chain no organisation can function. This has far-reaching implications for the measurement of performance, although these have yet to be discovered by either accounting doctrine or the management theory that has accumulated around the concept of the command model. Resting the measurement of performance on the platform of the process chain yields many advantages. The most important is this: the most fundamental characteristic of both standard accounting doctrine (SAD) and much management theory is to decree what ought to happen. They are both prescriptive. Their common stance is that if what is happening is not what ought to be happening, it should be: ergo what is currently happening is ‘wrong’. However, this approach can be singularly unproductive. The value of making measurement dependent on such precepts as deviation from a plan which may be notional or on what functionaries are supposed to be doing – such as coordinating or controlling – when it is evident to all that they are not, is open to question. Clearly this has far-reaching implications for the measurement of performance. The principal potential disadvantage is the risk that in seeking to measure what ought to be happening you end up measuring the wrong things, and if you measure the wrong things you will at best get an incomplete picture of current performance. By contrast, the chapters that follow show that in measuring within the process chain you are more likely to be registering what matters, such as current events that are determining the level of performance. It is the purpose of this chapter to show that rigid adherence to the command model can be a source of additional and avoidable cost because it can constrain people from doing what is needed to ease and support the process flow. The experience of one company reported here clearly demonstrates the scale of these unnecessary costs. The concept of the process chain has several other natural advantages. If performance is determined by the efficiency of the process flow it is essential that it is impeded by the minimum number of disruptions. Where these occur, the following must be recorded:

• • • • •

how frequently they occur how long they last what each disruption has cost what caused the disruption what has been done to reduce the risk of it recurring.

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The section ‘Counting the cost of disruption to the process’ demonstrates that these conditions are not always adequately met: that sometimes because the source of the disruption proves hard to trace, those in charge sometimes give up and accept these recurring events as inevitable. Where this happens it is essential that how much this is costing is accurately recorded, because this data will be the most effective spur to a renewal of effort to put things right. Finally, it is the aim of the section entitled ‘How to measure the cost of command’ to make plain just how essential it is that people know what it is that they are doing that is being measured: that while in practice the application of both accounting and management precepts can obscure this, recognition of the imperatives of the process chain can afford the transparency that is needed.

Measures and the Process Chain Right from the start planning has been cast as the key to performance measurement, such was the import of the notions of deviation and variances that were to be calculated. The purpose of the two preceding chapters was to set out the multiple reasons why plans are apt to go adrift. They are all avoidable and the results of any shortfall can be measured. There is, however, another element which can throw any plan off course. It is a condition for the success of any plan that it recognises the power of the process chain. The process chain has yet to be recognised by SAD and much of the wide expanse of management theory. The principal exceptions are those who in recent years have championed the idea of lean management. In so doing they have made a big contribution. However, it is an idea that has yet to yield its full benefits. The concept of the process chain has been transformed into that of the value chain. As will be made plain, it is an idea that is fundamentally flawed.

What Makes an Organisation Tick The process chain is something of an enigma. People may not know it by its name but there are few who are not keenly aware of it, for it is the reason why they are there. Once they have learned how to do the work for which they have been engaged people do not have to be told what to do – it is as obvious as getting on a bus to get to work. As will be seen shortly, this has implications for the measurement of performance. The function of the process is to achieve the organisation’s purpose: it is a motor that makes every corporation tick. The process is the motor and the master. The best way to illustrate how an organisation functions is drawn from a simple model that is at centre of the concept of productivity. Every process starts with an input and ends with an output. In a manufacturing concern it usually begins with order intake and ends with delivery to the customer. With a retail store that has a wide presence in the high street it is different. The process begins with the purchase of merchandise (get it wrong too often and you go bust) and ends with a myriad of transactions at the tills of a chain of outlets. A charity begins with the collection of funds and ends with the execution of good works. Turn to the public sector

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with a hospital and you can witness people in need of treatment at the entry point and at the exit cured patients or those who have been less fortunate. Because corporations depend on the process chain for the achievement of their corporate goal it is in the interests of everyone who depends on it for their livelihood that it should flow smoothly. Yet in business corporations it rarely does – it exhibits what students of organisation refer to as turbulence. This means that the process flow is often disrupted. The significance of such events cannot be overstated because they have the cumulative effect of putting the achievement of the central goal in jeopardy. The impact of disruptive events can usually be measured but, as will be shown shortly, this sometimes does not happen, and this omission is a principal reason why they continue to happen.

The Difference Between the Process and Systems Everybody will recognise the process as the motor which drives the work in which they are engaged, but not everybody will know it by that name. Many will refer to it as ‘the system’. That term is not often used here for one reason and it is not a matter of hair splitting. Virtually every organisation – all except the smallest – has several systems. They may not be state of the art. When Morrisons – then a flourishing but downmarket grocery chain – took over upmarket Safeways, it emerged that while the acquisition had modern systems, those of the predator were rudimentary and much of the data handwritten. While this news caused merriment in the City, the fact remained: rudimentary it might be but it was a system and it had worked well for Morrisons for a long time. Even so, this mismatch cost them dear. It was one reason for a dramatic drop in profits – a result from which it took them some time to recover. Morrisons were an exception. Large corporations will have scores of systems – most of them of course driven by computers. But every organisation, no matter how big, has no more than one process. Take a sales office that receives orders from customers. It will have at least one system. As orders arrive they will be entered into one of these. But then switch to the wider picture. The sales order office – as it may be called – will represent just one stage in the process chain.

Help or Hinder A key question, often inadequately addressed, is whether a system helps or hinders the process chain. Systems sometimes impede the process. Where this is the case, it is usually because those who have designed and installed the system have an insufficient understanding of the process chain itself. Such shortcomings in systems were first brought home to me when I was being introduced to my first job in a factory that assembled aircraft. Gerry, my coach, put it this way: ‘Dave, the first thing you have to learn is the system; the next is how to short-circuit it.’ This advice meant one thing: that the system was not adequate to meet the needs of the process. I was subsequently to learn that this mismatch was the cause of a vast amount of activity – hunting for missing parts – that required the services of scores of staff. The cost was never counted. The absence of measures was one reason why the problem was not addressed.

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Stages in the Process Chain An immense advantage of the process chain, to be examined more fully later, is that in any organisation it divides itself into stages that are easily identified. These are ideal for the purpose of measurement. They are the product of its own internal logic. In this respect they are the converse of the departments into which organisations are conventionally fragmented, and the number and shape of which are often the personal preference product of the person formally in charge.

Counting the Cost of Disruption to the Process Because a business organisation is there to achieve its central goal and this depends on the smooth operation of its process chain, you might expect people in every part of it would single-mindedly bend their collective effort to the corporate wheel. But no, this often does not always happen. As a result, disruption is a common occurrence and this is not always accorded the priority treatment it warrants. The causes of disruption are of two kinds: 1. Events that bring the process to a complete standstill. Those examined here are equipment

failure and the absence of parts that holds up assembly work. Clearly these are restricted to the manufacturing environment. 2. Disruption which rarely stops the process completely, but the sources of which are enduring. They severely impair the efficiency of the process. These can affect any organisation.

Short-term Causes of Disruption Equipment failure  It takes two to keep a machine running: one to work it, a second person to repair it. The closer these are physically, the smoother the operation is likely to be. Because machines work as they should most of the time, it would make no sense to permanently allocate an engineering tradesman to each piece of kit. So they are spread across several machines or many. And this is where the problems begin. Typically the manager in charge of the engineers will receive several calls for assistance simultaneously and has to decide the order of priority. Those in charge of production departments will be under pressure to achieve targets. This pressure spreads to individual tradesmen who will complain of having to work with a production manager ‘breathing down their neck’. Naturally, these pressures are a source of friction. Often the heat is such that a tradesman does not have the time to make a complete repair, so it is not long before it fails again. Machine operators are often critical of the skills of engineers, who accuse their production counterparts of taking inadequate care of the equipment in their charge. The way the engineering function is organised can exacerbate the tension. Where the tradesmen work from a central base – usually a separate department – you are likely to

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have two fortresses that generate conflict. If tradesmen are distributed locally to a limited range of equipment, the level of hostility tends to diminish. Measuring time lost can be a source of contention. Typically each of these two functions will record the time taken in dealing with the emergency but these often do not tally. For example, a tradesman may record the amount of time spent working on a machine while his production counterpart will register the length of time the equipment is idle. These figures rarely match but it is easy to get them wrong. Production workers may inadvertently attribute a stoppage to equipment failure when the cause is altogether different. In a flour mill it was part of the task of workmen to place pallets in a machine called a palletiser which placed them in the position needed to accommodate material. In the interests of reducing costs the unit chief decided to buy cheaper pallets. However, a proportion of these could not be used because of their poor quality. The workmen now had to inspect them before use, which meant leaving the machine unattended for short periods. Getting these tasks done frequently became a scramble. Yet the recording of performance data remained the responsibility of these workmen. Sometimes in the melée, mistakes were made. One of the most frequent was to put the pallet in upside down, causing the machine to jam. When this happened, it often took an hour or so to get the machine restarted, causing a substantial loss of throughput. The cause of these stoppages was recorded as ‘machine failure’. The finger of blame was pointed at the tradesmen charged with maintaining the equipment. It was only when an assignment in which my colleagues and I took part that the facts were unearthed. As a result, the tasks of the workmen were rearranged to reduce the risks of mistakes being made. These changes soon paid off and there was a sharp drop in stoppages. Moreover, when these did occur, more care was now taken in recording the causes. It is worth noting that while this cause of lost throughput had gone unchecked, no effort had been made to set the cost incurred by stoppages against the gains made by using cheaper pallets.

The World of Missing Parts A common activity across the engineering industry is the assembly of parts to make a product. Often it is a sequence of such operations which produce what are technically termed sub-assemblies. The last stage in this chain is often known by the name of final assembly. A motor car, for example, is the result of scores of sub-assemblies; an aircraft is the product of hundreds. The more complex this process is, the greater the risk of one or more parts not being where it is needed at the right time. The missing item may be made elsewhere – an increasing trend with the spread of the practice of outsourcing. This increases the length of the supply chain and adds the risk that the absence of one small piece will hold up the whole operation. If the product is as large and complex as an aircraft engine, the cost can be immense. Some of the costs of missing parts can be measured, not least those incurred by the time spent searching for them. In a factory that assembled aircraft parts substantial resources were allocated to this activity. There was an entire department staffed by functionaries called progress chasers. However, because over a period of time those in charge had not felt reassured by the results achieved, their efforts were reinforced by another department consisting of

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technicians known as project engineers (as part of my introduction to the plant I spent some time working in this department). You might have thought this was sufficient, but you would be wrong. Production managers assessed the proportion of time spent by their supervisors searching for parts at an average of 40 per cent. The costs of this huge collective effort could be measured. This was not done. It might be supposed that at some stage, managers realising that having three groups of people sharing the same task and not turning in an acceptable performance would have reviewed the way things were done. Had the costs been readily available this might have nudged them in this direction, but this did not happen.

Long-term Causes of Disruption These are:

• • • • • • •

divergent goals inadequate planning the absence of data essential for control the inability to diagnose the causes of recurring problems the inability to take prompt corrective action the belief that disruption is beyond cure the perennial conflict between process chain and command organisation model. The issue of divergent goals has already been addressed.

Inadequate Planning The interaction between the process and planning can be complex. The shortcomings that have been examined are a cause of disruption in the process. Conversely, turbulence in the process that is caused by other factors can cause havoc in efforts to implement plans.

Inadequate Data Numerous instances have been reported in the preceding pages in which essential data has not been available. In many organisations the proliferation of IT systems – often hailed as the answer to the data famine – does not seem to have made a noticeable difference. In the absence of the genuine article, managers can conjure up figures and use them to their own advantage. In the case which is next reported there are three key players. George was the unit chief. Tony Preston was his deputy, in charge of a project which gave workpeople a greater measure of day-to-day control of their work; and Peter, the quality control manager. I had been at work assisting Tony for some time. I noticed that most days George and Peter would meet and indulge in a bout of ritual handwringing over the ‘dreadful’ quality figures. As in recent weeks I had gained the impression that the quality of products (they were made from potatoes) had improved, I raised the issue with Tony. He instructed the team of workpeople to keep accurate figures of the number of rejected items for a week.

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This they did. At the end of the period Tony compared the difference between the figures collected by his people and those reported by the quality control (QC) department. The figures did not march. Those reported by QC exceeded by a factor of three those collected by the people who had made the products. Tony conducted an enquiry. It emerged that Peter had been regularly adding to the figures handed to him by his staff. When questioned, Peter admitted that this he had done because he feared that an improvement in quality would jeopardise the future of his empire. Peter’s departure was unlamented by his own staff, who had long been uneasy about his manipulation of the numbers supplied by them.

The Inability to Identify the Causes of Recurring Problems The corporation that is good at pinpointing the sources of recurring problems is a rare animal. As will be seen shortly, this is not a local issue. Some of the most perceptive observations recorded are those of Japanese engineers who have grappled with the problem in their own country. Because those in charge are understandably reluctant to admit the lack of success in tracking down the causes of recurrent disruption, evidence is scarce. What there is confirms the scale of the persistence of this dilemma. The worst outcome – and it is a frequent one – is to run up the white flag.

Inability to Take Corrective Action A familiar scenario is one in which the organisation or unit chief knows that things are going seriously wrong but despite efforts they have made, they still have no clear idea as to the cause. At the other end of the organisation Tom, Dick or Harriet will tell you that yes, things are going wrong and have been doing so for some time. They have reported it to their supervisor several times. Nothing appears to have happened: they have given up on it. So you have a paradox. The person at the top has the power to put things right but lacks the information they need to use it. Tom and his co-workers know all too well what the problem is but they are powerless to act. On a recent occasion my colleagues and I were working on an assignment in a company. It was obvious that a machine was not working as it should. We heard the familiar story from Tom. He had given up trying to get corrective action. We asked him his estimate of how much product was being lost. He reckoned 700 units per hour. We asked the permission of his supervisor to measure the output for a few hours, explaining the purpose of the request. It turned out that Tom was not far wrong. It was losing 650 units per hour. Having dug a bit deeper, getting figures from the accounts department, we were able to establish that in monetary terms this amounted to £75 an hour or £600 each 8-hour shift. Were the fault to go unremedied for a year – unlikely of course – you were looking at a loss of £150,000. We gave these figures to Tom and advised him to hand these to his supervisor. As we left him he muttered: ‘Why does it take a bloody consultant to get things done in this place?’ And of course Tom had a point. Later that day we noticed two engineering tradesmen working on the machine. The next day Tom reported that the equipment was operating at its correct speed. It had taken the tradesmen just one hour to fix it.

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But this still left Tom’s question unanswered. Why did it need external intervention to get corrective action? Short of the Topbread solution, what could have been done to get a swifter response? Part of the answer at least may be found in the action we took. If data – how much money was being lost by inaction – is regularly and readily available to those directly affected, including Tom’s supervisor, this might provide an incentive that is otherwise not there. This is what it takes to displace the two elements that inhibit people from responding to the imperatives that are clear to them. The antidote to the constraints imposed by the command model and the inertia that it feeds is the universal recognition that such inaction is a source of substantial and avoidable cost. When things do not go as planned, the process chain is disrupted and this often creates a situation variously described as an emergency or a crisis. The true cost of activity in dealing with these is not always fully recorded. Now in dealing with these, SAD is not at its best. As already noted, the only situation it recognises that could qualify as an emergency is a deviation from what has been planned. The single remedy that is advocated is to hold an investigation, followed by the preparation and submission of a report. The presumption is that this may be followed by what mainstream managers call a post-mortem. This in a roundabout way is an apt description. By the time this lengthy procedure has been exhausted, the organisation may still be afloat but the vessel may have taken in a lot of water. Existing contracts and jobs may have been lost, excess and unnecessary costs may have been incurred – all of which may trigger frenetic activity. This will be directed at putting right what is going wrong with maximum speed. Such activity is most usually referred to as ‘firefighting’. Other names may be used, most of which are euphemisms. ‘Troubleshooting’ suggests that the situation is more under control than is warranted by the facts. ‘Crisis management’ is undiluted hype. In the organisation context nobody ever ‘manages’ a crisis. The best you can do is to cope with it.

How Long and How Often and How Much Three prime considerations about emergencies are how frequently they happen, how long they last and what they cost. In terms of frequency the risk is that they occur so often they have come to be regarded as a natural everyday event, an experience registered in the immortal words of a supervisor at an American motor car plant when he declared ‘emergencies is normal’ (Walker and Guest 1952). Duration is important because it will determine the amount of throughput lost or the number of transactions uncompleted. The third factor is money. Both frequency and duration have to be recorded, the time lost registered and converted, preferably into money terms.

How Managers Respond Where dealing with emergencies is a common event there are two alternative scenarios. It may be viewed as a temporary expedient to get the operation ‘out of a hole’. Then when the crisis has passed it may be that the sequel will be determined, in an effort to pinpoint the cause so as to take remedial action which will reduce the risk of a recurrence. The alternative is to throw in the towel and settle for firefighting as a way of life. The choice that is made between these two options has far-reaching consequences in terms of cost.

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There is a third approach to handling emergencies and it is that which is the most commonly applied by far. It is an expensive course of action although the costs are not always recorded.

A Zigzag Path There is a common pattern of events and it takes this form. For a long time a predominant activity is putting out fires, day after day. Then there is a sudden change in direction when something goes spectacularly wrong – usually events that lead to the loss of a valued customer. There is for a time a new watchword that circulates within the upper echelons: ‘things cannot go on like this’, ‘this has got to be cured once and for all’. This phase typically lasts for a few months. So a programme is introduced – often to the accompaniment of a fanfare – that is designed to hunt down the cause. The chief may rely on his managers to do this or may call in consultants from outside. In either case the outcome will be the same. They will attack a symptom with the result that the source remains undetected. The project having failed it is unlikely that a second attempt will be made. As the programme recedes from view, the daily pattern of firefighting rules once more: that is until the next spectacular mishap. Although for many organisations firefighting is essential to survival, there is a downside that exacts a heavy price. Managers become accustomed to behaving in reactive mode and rarely try to head off trouble before it hits them.

The People Dimension The human dimension of dealing with emergencies has two aspects. The first is stress. It is not uncommon to hear a manager express his frustration in terms such as these. He may glance at the clock. It is nearly five o clock: ‘When I was on my way to work this morning I made a mental list of five items that were priority. I haven’t been able to start on the first of these.’ The level of stress endured by some is indicated by the words of a manager making parts for aircraft who said to me, ‘Sometimes when I get home I can’t remember how I got there.’ There can be wider consequences. People in all parts of an organisation can draw the conclusion that nobody is really in control. There is no need to dwell on the effects of this judgement on levels of motivation. The incidence of emergencies can affect the behaviour of some people in quite a different way. There are certain individuals who come to be seen as good at firefighting: as a consequence they become stakeholders in the practice of putting out fires. Naturally they are unlikely to emerge as champions of reform.

The Surrender Syndrome As already reported there are some organisation chiefs who, having battled unsuccessfully to restore control by getting a handle on emergencies, eventually throw in the towel. Living with disruptive events is not a unique local phenomenon. It is an issue that has exercised Japanese engineers for years, although their focus has been the shortcomings of

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highly qualified technical specialists who, having failed to find a solution to a recurring problem, are apt walk away from it, declaring it insoluble (Nakajima 1989). There are few who need reminding of the disintegration in mid-air of a Nimrod aircraft in 2005 during the war in Afghanistan. The report of the official enquiry set up to identify the causes of the disaster concluded that although there was no one single cause, the most prominent was frequent leakage of fuel in a space that was in close proximity to the aircraft’s engines. The inquiry also found that the frequency of these fuel leaks had been common knowledge amongst those who were familiar with the aircraft for many years. There was common view rarely if ever challenged that it was an insoluble problem that simply had to be lived with. This assumption was shared not only amongst Ministry of Defence officials and those working for the manufacturer, BAe Systems, but also the RAF engineers who regularly serviced the machine at its base. So it took a tragedy on this scale to persuade all who were involved that an attempt should be made to find an answer to a problem previously written off as insoluble.

Building a Stake in Emergencies As already noted, there are people who become good at putting out fires and can come to be valued as operatives who can rise to the challenge that emergencies present. Such was the case with Mick, a supervisor. Digon is a long-established engineering company situated in the Thames Valley. This is how I first came to learn about the part that Mick played. I had been working on an assignment there for some time and had come to know some of the workmen quite well. One day as I passed their work station I noticed all nine men were kicking their heels with nothing to do. ‘What’s the problem?’ I asked. ‘Waiting for parts, Dave,’ came the reply. ‘Does this happen often?’ ‘Most days.’ ‘Is there any time when you don’t have to wait around like this?’ There was a pause. The workmen looked at each other; then one of them replied: ‘Yes, when Mick is away’ (nervous laughter). Mick was their supervisor. They then explained how they were able to organise their work more efficiently when he was not there by sharing amongst them the tasks to be done. As I continued to work with this group a clearer picture began to emerge of the way things were done in the factory. The task of these workmen was to assemble parts to make a bulky piece of equipment called a side-entry mixer for use in the offshore oil industry. By the time pieces reached the team from the previous stage in the process, they usually were already well behind in

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the programme. When they saw an opportunity to speed things up by as much as three weeks they were restrained by Mick. The reason for this apparently strange behaviour gradually emerged. Every week there was a progress meeting with the unit chief in the chair, an occasion for ritual handwringing over the prospect of late delivery to the customer. The chief would then turn to Mick. This was his cue. It was the moment that Mick came into his own. He assured Simon that ‘he would take care of it’. He could then do what he had done many times before. The assembly of the machine would be completed and despatched within a couple of days, thanks to Mick’s magic touch. The workmen could see through all of this of course. Mick’s achievement was to regularly get the unit chief out of a hole that Mick had diligently dug. Simon must have known his shortcomings as a supervisor, but this did not matter as long as he continued to produce the rabbit out of the hat. Simon had never made any serious attempt to establish the reasons why products invariably got behind the planned programme. With Simon, a highly qualified scientist, it was a taboo subject. When I put this question to any of his managers the reply never got beyond: ‘It has always been this way.’ This erratic process had costly consequences. When work that had been delayed eventually came through, it usually had to be rushed and the quality of work was often the casualty. Obvious faults were spotted at the penultimate stage – spray painting – and parts of the equipment had to be dismantled for corrections to be made. Because the organisation of the plant was weak the wrong parts were often delivered to the assembly workstation. If the right part could not be found quickly, it would have to be replaced causing further delay. While all this was going on workmen at stages downstream from Mick’s section were left in enforced idleness – just like the workmen with whom I had had my earlier discussion. So it suited Simon to live with regular recurring disruptions in the process and to rely on Mick’s apparent wizardry to save the day. But it came at a price, incurring avoidable costs which remained hidden from view. The way things were done at Digon serves to demonstrate how as this modus operandi gets established key players in the weekly pantomime build a stake in firefighting that creates a barrier to moving to a more rational form of management. This weekly ritual continued for 20 years. It only came to an end when Digon was acquired by a large and well-respected British engineering company. Within the first year after its acquisition the whole management team had departed. I was never able to find out what happened to Mick. Sadly, there are still numerous unit chiefs like Simon. Not only do they lack the will to break free from an endless round of emergencies, they make no attempt to count the cost.

How to Measure the Cost of Command How the Command Model Impedes Corrective Action Pakrak makes sportswear products. Demand is seasonal and it is now peak time. There is a hold-up at a stage in the manufacturing process at which a machine wraps items in plastic

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material. Supervisor Jill contacts supervisor Jack, who is in charge of the preceding stage ‘upstream’ in the process which feeds in the material. They quickly decide what needs to be done to sort the problem. It is 10 o’clock in the morning. Jack knows that he is unable to take the action needed because he must first have the permission of his manager. However, his manager is tied up in a meeting with a representative of a customer. Time passes. It is one o’clock before the meeting ends. Jack now gets the permission he needs. During the three hours that his manager has been inaccessible, the machine has limped along at 60 per cent of its normal capacity. This delay has cost the company money. It is easily calculated. While at the end of the day total production figures will be fed into the system, these will not record as a separate item the three hours lost on the wrapping machine (neither will any reason be entered to account for lost time that makes reference to the manager’s inaccessibility). In other words, you will have figures but they will not tell you what should be known. The figures will be absorbed into a pot recording production lost due to faulty equipment, so it will be the engineering department that gets the stick. The causes of lost time where the process is held up will be routinely logged – be it equipment failure, missing materials or components, absence of a workman receiving medical attention. I have yet to see a record of lost throughput which attributes the cause to the unavailability of a supervisor or manager, so the fact that protocol prohibits corrective action by those best placed to take it remains concealed. Yet there are organisations in which this is a weekly, if not daily, occurrence. In effect a blind eye is turned to the fact that adherence to the command model can cost you money – another instance, you may conclude, of missing out on the measures that matter. There were similar results but on a wider scale at Silentbloc, a company making shock absorbers and located at Crawley in Sussex. Colin, the general manager, was having problems with the manufacturing process: he was not meeting his production targets and there were problems with product quality. My colleagues and I had been asked to help in pinpointing the source of the problem and to recommend measures to put them right. From my initial discussions with Colin, I gained the impression that he was pinning his hopes on our coming up with a magic system that would solve his problem without too much disturbance in the way things were currently done. I tried to warn him that my associates and I were not in the business of peddling management gizmos and that our approach was to measure the estimated costs and benefits of whatever solution we might suggest. Whatever positive attributes Colin may have had, listening skills were not one of them. There was a day shift of 80 people and a night shift of 30. We began by asking for what production figures were available. We found that the only data recorded were for the total output of both shifts, all lumped into one. We asked for these to be kept separately for each shift during the time we expected to be there. We then looked at how the day shift was run. Workpeople were divided into sections that were tightly organised, each with a supervisor in charge. Each machine was surrounded by freshly painted yellow lines and workers were instructed not to stray outside these without the permission of their supervisor. We discovered that they had also been told that if there was a stoppage on the line they should on no account take action to put things right until they had the authorisation of their supervisor. We observed that when this happened the supervisor was often not there.

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Having spent the best part of a week on the day shift we switched to nights. The contrast between the two shifts could not have been sharper. When we arrived, we were met by Doug, the supervisor (though he was grandly titled ‘night shift superintendent’). Doug was in his sixties, looked frail and wore the pallor common amongst those who work permanently at nights or who are long-term residents in HM prisons. He greeted us warmly, remarking, ‘I can’t remember when we last had a visitor to the night shift.’ A picture quickly emerged. Doug told us, ‘I just let them get on with it. They know what has to be done.’ The atmosphere was relaxed. The yellow lines around machines were ignored. The workmen formed three groups. If one group had a problem the others helped them out. If something went awry it was dealt with at once. There was a lot of good-natured banter. At the end of the first week we received the figures for the week’s throughput that we had requested. These included the following data:

• Total number of stoppages lasting 15 minutes or more: −− Day shift 27 −− Night shift 5 • Number of units produced: (remember, the number of night shift workers was a third of their daytime counterparts) −− Day shift 560 −− Night shift 535 • Defective items: −− Day shift 47 −− Night shift 6 • Total value (approximate figure) of day shift −− Throughput £35,000 −− Night shift £87,000 Towards the end of the assignment we met with Colin. We handed him the figures we had been given. He looked unimpressed. ‘So?,’ he asked. We outlined our recommendations, adding that in view of the figures he had (and which were previously unavailable), what we were recommending was obvious: to extend the flexible working practices of the night shift to the day shift. Flexible working practices employed by the night shift would mean scrapping the rule that workpeople must get the approval of their supervisor before acting to put things right. When they had remedied things, they would tell their supervisor what they had done when he returned to the workstation. Colin listened to what we had to say impassively. At the end he replied: ‘I am glad you have brought to my attention the way the nightshift are not following the rules. I shall take action straight away to bring them into line. For a long time now I have suspected that the real problem at this place is a lack of fundamental discipline. You have confirmed these suspicions.’ We reminded him that the figures indicated that to take the action he proposed would have an adverse measurable impact on performance. He brushed this argument aside.

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Colin was determined to stick with the command model in the face of all the evidence that it was the principal culprit in current underperformance. Fortunately, he did not get the chance to put his intentions into practice. When I tried to telephone Colin a few months later I was told that he was no longer there. Both Pakrak and Silentbloc were companies in which rigid adherence to the command model was blocking efforts to put things right that were not going to plan. In both cases the negative results could be measured but were not. At Silentbloc we got some figures which enabled us to make a comparison between the performance of different shifts but these were not normally available, although the obduracy of the unit chief was such that it would have made no difference.

Conclusion Rigid adherence to the command model can have adverse consequences, both on performance and on its measurement:

• It can prevent or delay corrective action when things are going wrong. • It can create ambiguity, leaving people uncertain as to what they should be doing and how their performance will be measured. The consequences of this ambiguity are the subject of the next chapter.

How Measures can Leave People in the Dark The process chain often plays a big part in the measurement of performance but this is not always made plain. This can sometimes be attributed to the prominence accorded to the command organisation model. A spotlight was shone on to this issue for the first time when a research team at Birkbeck College examined the role of supervisors during the time that Ford was assembling motor cars at Dagenham in Essex. The official job description of a supervisor was terse: ‘The function of a supervisor is to manage his area.’ However, the researchers found that in practice supervisors spent on average a third of their time ‘plugging holes in the system’. For example, if a workman was absent, the supervisor would take his place. If there was nobody to work the overhead crane, again the supervisor would step in. When the team reported its findings to the plant chief and his aides, the response was frosty. They insisted that the researchers had got it wrong. What they had witnessed, they were told, had been a series of freak events. Some heavy persuasion (the project was being funded by the company) led the research team to modify its conclusions. The report that was published declared that what had been witnessed had been an ‘aberration from the norm’. Not long after the publication of the results of the survey, I was at the Dagenham plant talking with a group of supervisors at the plant. Among the issues up for discussion was how their performance was measured. I began by referring to the company official statement that their responsibility was to manage their area. I asked them what this meant to them.

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One of the group, Joe, responded: ‘How long is a piece of string? It’s just the way management talk at this place.’ Stan, another supervisor, added, ‘It’s just waffle. It’s typical of the American garbage you keep hearing. You can’t become a manager at this place until you have learned to speak this language.’ Another supervisor chipped in, ‘Yes, one of the things this company is good at is brainwashing its managers.’ I asked, ‘So, how do you reckon your performance is measured in practice?’ Joe, again: ‘By the way we do the job of keeping the line running without stoppages.’ I asked: ‘But surely some stoppages will be caused for reasons outside your control?’ Joe: ‘Yes, but it makes no difference. It’s all about how well you are seen to be playing your part in keeping up with the line.’ Stan: ‘There’s more to it than that. What matters is how well you are seen to be keeping the line running during February.’ ‘Why February?’ ‘Because the assessments are made in March every year and they don’t seem to remember what happened during the months before.’ Later I met with Bernie, one of their managers. I referred to the findings of the survey. He insisted that what the researchers had seen was not typical. What they had witnessed was, he confided, an abberation from the norm. Clearly this was the party line amongst managers. When I went on to ask him about measurement of performance, he insisted that supervisors (who he called his ‘front-line managers’) were assessed on how well they managed their area. Talking with Bernie you got the feeling you were being engulfed in verbal cotton wool. We had been talking about 20 minutes. Suddenly Bernie sprang to his feet. He was looking over my shoulder at the wall of his office. I turned around. When I had entered his office I had noticed that recessed into the wall was a green light. Now it had turned red, which meant the line had stopped. We shook hands. Bernie made a hurried exit, leaving me to find my own way out and giving me the opportunity to talk with his secretary in the outer office. She explained that Bernie was having a bad time that week; the past few weeks had been no better because the line had stopped so many times. As I walked towards the company car park I mused that this must have been just another transient abberation from the norm … Putting the conclusions of the Birkbeck research together with what I had heard during my time at the plant, I tried to assemble the pieces to get a picture that was as close as possible to the truth. Bernie did not come across as a manager in control of events. He was having to react to the disruptive happenings that were undermining efforts to keep the line going. This overriding concern supported the supervisors’ conviction that it was

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their performance in keeping up with the line that was being measured. It was bolstering the process chain with which the link to the plant objective was clear. Yet it was clear that at the management level nobody was prepared to come clean. And the reason? It was understandable that managers were reluctant to admit to outsiders that the process was disrupted frequently. What was less clear was why managers were unprepared to talk about it with their supervisors. For when Joe and his colleagues were criticising the language used by managers they were telling me that it was their practice to speak in code. The code was informed by the command model and this was what was creating the ambiguity that left unclear how their performance was measured. And it was another reminder about the constant clash between the command model and the process chain.

Conclusion The focus on the process chain gives the edge to measurement. It moves measures from effort to calculate the results of achievement or underachievement of what is supposed to happen because it accords with the doctrine of measuring the reality of what actually happens in practice. It is here that the paths of a more pragmatic approach and that of SAD diverge. First, one purpose of Chapter 4 has been to examine the causes of the happenings that frequently disrupt the flow of work across every organisation. Secondly, it has taken a critical view of the way the traditional command organisation works and concluded that its capacity to achieve its primary objectives is at best open to question. Thirdly, it has examined the way the application of the command principle impedes the process flow and it has demonstrated that when this happens it incurs costs which are usually measurable. Finally, Chapter 4 reveals how employing the precepts of the command model can leave people uncertain as to what is expected of them.

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5 Reforming Measures

Introduction The preceding chapters suggest that there were shortcomings in the theories woven by the champions of SAD and the apologists for traditional management ideas as an instrument for achieving their goal. Substitutes need to be found for some; others need to be reformed. This section deals with the latter.

What Needs to be Done to Reform Standard Accounting Doctrine Fact and fiction about overheads ‘Over’eads,’ declared Harry, ‘is anything south of Wigan.’ Harry was in charge of making conveyor belts at a factory located near Preston in Lancashire. It was one of several within a company administered from a head office in London. Harry was a dour Lancastrian, notoriously parochial in his outlook. For him, head office was part of a distant world that he viewed with undisguised distaste. The way he saw things, the centre simply absorbed what was earned by the sweat of people who worked hard making unglamorous products. While few were so openly critical of the corporate headquarters as Harry, many other managers shared his antipathy towards the centre and this is not uncommon. A common view is that the constituent parts of the company have to support (that is pay for) these apparatchiks whose contribution is not obvious. To add insult to injury, local managers are often urged to use the services that these central departments are seen to push. (Some of the wiser business chiefs have recognised these sentiments and responded by allowing managers to go outside to buy in services which head office staff claim to have the expertise to deliver.) The costs of such concessions are noted shortly.

Unyielding Anachronisms Frequently these central staffers are seen as seeking to roll out programmes which local managers are expected to put into practice. The results of these are rarely measurable. As a rule local managers cope by bending with the wind, doing the bare minimum to further these head office initiatives and waiting for them to pass. Harry’s narrow interpretation of overheads is quite common amongst managers. However, as part of SAD it is a lot broader. The whole idea of overheads does little to advance the cause of measuring performance but the fact that it is so widely used means that it cannot be ignored.

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The origin of the idea is lost in the mists of industrial antiquity. The cradle of cost accounting is the factory. (Although management accounting is more recent it is still skewed towards factories.) You need to know where the money is going, hence the focus on pinning down costs that have been incurred. This has led to a huge effort to allocate cost to specific products or services, which in turn has generated some conventions the purpose of which is not immediately obvious nowadays. Because at the time that SAD was evolving a typical factory employed hundreds of workpeople, a principal concern was the cost of ‘labour’ in accounting language, and an expression that would have been familiar to the economists of the Victorian era. It was the aim of getting a grip on this kind of cost that labour was divided into two categories: direct and indirect. Direct labour consisted of the people making things by using their hands. The cost of employing these people, SAD argued, could be pinned to a specific product. But of course, you needed not only people to work machines but others to keep them going. Engineering tradesmen typically service all areas across which a range of products is being made: hence SAD calls them a ‘shared resource’. However, it is not only tradesman who are widely deployed: this applies to other occupations including supervisors and nowadays IT staff. Their employment costs cannot be pinned down to a single product but have to be anchored somewhere. There is only one slot available and that goes by the name of overheads.

A Pot Called Oveheads When the vast majority of employees were manual workers qualifying as direct labour, the reason for this convention could be readily understood. However, today in the typical factory ‘directs’ form a tiny minority of employees (a recent American estimate put the figure at 8 per cent) and they are vastly outnumbered by ‘indirects’, all of whom crowd into the overhead pot. Overheads are by now taking a shape that Harry is unlikely to recognise, but the overall result is this: the rationale for the division of labour into two categories has melted away. The industrial landscape has been transformed in another way. In response to an ever more demanding marketplace, companies have to produce a wide range of different products in small quantities. In factory parlance this means that the opportunities for ‘long runs’ (machines running with minimum interruption for long periods of time and making the same product) have become rare. As a result, machines have frequently to be stopped and reset. It is not only the corporate finance department that has been slow to adjust to this new challenge. Many manufacturing chiefs have continued to live in the shadow of the early industrialists who were able to churn out huge volumes of a standard product and to count on the continued custom of eager buyers. This is not supposition. As recently as late in 2008 Alan Mulalay, chief executive of the Ford Motor Company, admitted before a Congressional committee that he and his colleagues across the American auto industry had continued to operate on the assumption that ‘if you build them they will come’. The message is stark enough. If you as a maker of products are to survive you will give the customer what they want (at a price that preserves your profit margins) when they want it. This means that you have to make several products simultaneously. If they want

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to stay in business, both company accountant and mainstream managers have to learn to accommodate these changes.

Cost Centres The idea of cost centres is at the heart of SAD. They are simply the departments into which organisations are conventionally divided, but renamed to form a basic cost unit and are seen as an instrument designed to facilitate the exercise of control. However, to bolster the effort to achieve this aim an elaborate web of theory has been spun, the benefits of which are hard to discern. This is how the theory goes. Take a production department (alias cost centre) and a department (also alias cost centre) which is there to provide a service such as IT. Because, as already noted, IT is a shared service, the question is where and how to allocate the costs incurred (this is technically known as cost absorption). The principle to be applied is this. All manufacturing support costs, such as engineering, are assigned to production departments. These are then allocated to each unit of product according to an actual or budgeted standard of time each product spends in the production cost centre. This is another issue on which the world of the finance department and that of mainstream managers are poles apart, for if the principle were to be applied it would create an intolerable burden in terms of data recording, the purpose of which may not be evident to those residing outside the hallowed precincts of finance.

Desperate Measures The champions of SAD are left with the dilemma of pinning down costs in a world that makes it increasingly difficult to apply their precepts. In the main they have resorted to complex formulae – always an indication that a policy is in trouble. To quote an unusually articulate critic (Debra Smith, a former professor of accounting at a US university), ‘these product costs are unknown and unknowable. It is impossible for example to know how much of computing expenses are spent on different activities to support which, if any, particular product’ (Smith 2001). She recommends that the computer and its staff be regarded as part of a long-term investment decision to support all products and that the cost of last month’s computing is a sunk cost that is unrecoverable. It is evident that the old prescription for finding out where the money has gone is no longer up to the job. It is just that the custodians of SAD are tardy in getting round to arranging the obsequies.

What to do about Overheads What have been traditionally classified as overheads are better described as operating expenses – the basic unavoidable costs of running an organisation. In the commercial sphere these costs have to be recovered from revenues generated by sales. That these are sufficient is all that matters. Effort to pin down costs to specific products or services is no longer worth the candle.

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The False Allure of Going for the Cheapest Lowest unit cost is the precept that does more to give members of the corporate finance department a bad name than any other. It is apt to reinforce their penny-pinching image, and of course they may respond, with some justification, that it is not part of their remit to be popular. Even so, there are genuine grounds for criticism. First, it puts its adherents in blinkers: it declines to consider the objection that to slavishly apply this principle can endanger the future of any company – and has already contributed to the demise of many. Secondly, lowest unit cost closes doors. It is narrow and compares unfavourably with the broader ideas of more from less or even more from what you have – ideas that are central to the concept of productivity. You do not need a master’s degree to see the potential dangers of elevating the lowest unit cost principle into a primary objective. Taking a knife to the sales force – an act which I have witnessed at first hand on numerous occasions – is an obvious example. In recent times it has been common for companies to institute drives to reduce inventory levels at all costs – sometimes literally. The results have often been disruption and waste. Such was the case with G-Med, a firm making and servicing medical equipment. Anyone familiar with hospitals will recognise the pressures created by the failure of a key piece of equipment such as medical scanners. To remedy such faults service staff depend on the availability of spare parts. The company finance department, in pursuit of its longstanding policy of lowest unit cost, issued an edict announcing a drive to cut inventory levels, which of course included spare parts. For the service department charged with effecting speedy repairs to hospital scanners the effect was disastrous. In every one of the regions into which the country was divided for the delivery of service, staff were desperately searching for spare parts as they tried to respond to the growing chorus of complaint from hospitals where the queues of patients awaiting treatment were growing longer. One day during this time, as I took a short-cut through the stores of the main factory situated north of London, I came across Gordon, the manager of the south-east region, his office located at a distance of 100 miles from the factory store. When he saw me Gordon grinned sheepishly. ‘You must be wondering what I’m doing here, Dave. Truth is we’ve got equipment down at [he named a well-known hospital located in his region]. My guys [his service staff] are going bananas. I’m trying to find a part that will help us to get it running again.’ So here was Gordon in search of a spare part, three hours drive from his base, and so unable to do what he should be doing – running a region that I knew had been bringing in more revenue than any of the six other regions: this the result of a crusade to cut inventory in pursuit of lowest unit cost. Subsequently, during the next financial year, the company as a whole lost service contracts with several hospitals as a result of dissatisfaction with the quality of service. The total value of these lost contracts amounted to over £500,000 a year. Belatedly, the business chief in charge came to see the dangers of giving his finance department too much rope: the policy was jettisoned just in time to save his neck. G-Med survived. There are many companies which have not, as a result of such myopic policies. .

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But there are greater dangers to any corporation than this. When the principle of lowest unit cost is combined with the propensity to chase local goals (a recurring theme in these pages) you have a toxic brew.

A Misuse of Variance Reporting Variances (the difference between a planned or budgeted result and the actual) come in three forms: 1. Volume variance (the number of units produced): did we make as many as planned? 2. Spending variance: did we spend more than budgeted? 3. Useage variance: did we use more than the budgeted inputs in terms of material or

people (labour) or machine hours? Variance reporting does not explain the cause of the difference. Achieving a favourable variance (for example achieving the planned result with less materials) is seen by many managers as a useful tactic in the furtherance of their careers. Seeking lowest unit cost can accelerate the trend for departments to pull in different directions. In the manufacturing context the procurement function is amongst those that are in a strong position to seek a favourable variance at the expense of unfavourable variances for the production department, which has to struggle to get by with inferior material, purchased at a cheaper price. As observed earlier, Harold at AWS proved highly successful in achieving a favourable variance at the expense of the performance of the engineering department and of the company as a whole. The pursuit of this objective encourages gamesmanship in playing the system, and this is invariably at the expense of the corporate goal. The example that follows demonstrates how this can be done while observing accounting rules. It is not uncommon for excess product to be built as a means of minimising unit cost. It is stored as inventory (thereby decreasing cash flow) in the reported financial results. Using standard product costing, the excess product is valued at full standard cost and a large chunk of plant expenses for the month are reclassified as an inventory asset on the balance sheet. So reported income and assets look good. In SAD the overhead allocation is assigned to all products and becomes part of the cost of the product. The product cost is removed from the expenses category and is redefined as an asset. Recognition of the expenses of making the product only takes place when the product is sold. This is known as revenue recognition and serves to reinforce a fundamental principle of financial accounting called matching. The expense of the inventory is matched to the time period of the sale of the product. Expenses are matched with the time period of revenue generation. This means that the expense of building the product will not appear in the financial statement until the corresponding sale of the inventory is recorded. Reporting according to these universally recognised accounting principles rewards the building of inventory until the time period in which the excess inventory is sold. However, when this happens the reported earnings will take a big hit because the allocated overhead cost will be charged to each and every unit sold. The difference in reported income is simply a timing difference as to when the overhead is recognised as an expense. It is a ruse that many companies have used to hide

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declining sales and profits by building inventory – a practice with the potential of a time bomb ticking away in the assets category of the balance sheet. There are instances like the above where the use of opaque accounting language is hard to avoid. However, its import shines through clearly. It lends itself to the concealment of underperformance.

Use of Resources – a Measure that May Mislead As has been noted, a key measurement of SAD is that of standard hours. The more you make within a defined period of time – which usually means making maximum use of machines and people – the more efficient you are. This piece of dogma gives the advantage to a producer of a standard product of which the Model T Ford was the shining exemplar. However, customers have long made it clear that they are not prepared to buy a standard product: to match their taste firms have to offer a variety of items. These have to be made in small quantities, which requires machines to be reset frequently. This can take a long time. The concept of standard hours becomes a less relevant measure. Seeking maximum utilisation of resources can prove damaging to a business. Some managers are slow to catch on. I worked for a manufacturing director whose fixation was machine utilisation. The higher the level reached, he believed, the more efficient the factories in his charge. He set up a team, of which I was made a member, with the task of doubling the output of a key product (reinforced hydraulic hose) within six months using the existing equipment. When the plan was announced, there was no shortage of doubting Thomases. The general view was that this ambitious project would fail. As a result of prodigious effort – and little sleep – we succeeded in meeting the target. It was congratulations all round. We basked in a glory that was to be short lived. We had produced the stuff all right, but only a portion of it found buyers. It turned out that the market requirement was for no more than 65 per cent of that which had been produced. The consequences were dire. We had recruited and trained more workpeople than were needed. We had insufficient space to store the product (our urgent task now was to scour the surrounding Lancastrian countryside in search of empty premises to hire), and a gaping hole was appearing in the company balance sheet. Now in the terms used by my manager, we were more efficient. Machine utilisation had never been higher. Measurement in terms of standard hours told us our performance was high. A year ago there was a very real risk that the company would go under.

The Need to Improve Practices for Setting Budgets and Targets Setting Budgets Many criticisms have been made of the bundle of practices that are employed in setting the corporate budget. Once the budget has been put together and signed off, it has been said, it is immersed in fast-setting concrete. Some of the consequences of this rigidity have already been examined. The most damaging is its contribution to the inertia

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that envelops most organisations and to which reference has already been made. Few organisation chiefs appear to spot the connection between the orthodoxies inherent in these practices and the inflexibility that occasions handwringing at senior levels. In a world where the ability to respond quickly to external pressures is paramount, the value of the traditional budget is limited. It is questionable whether the traditional budget today has any place: the more so given that there is an alternative readily available.

A Rolling Budget A rolling budget operates as follows: you first divide the financial year into quarters, then you set the budget for the first three months. During this first three-month period you prepare the budget for the second quarter. You then repeat this process during each of the quarters that follow. The immense advantage of the rolling budget is that it enables adjustments to be made in response to events that were unpredictable or uncertain at the start of the financial year. For example, as has already been remarked, a sales forecast, which is one of the foundation stones of the corporate budget, is no more than the best guess of the marketing department. If it proves to be wrong, as is commonly the case, revisiting the budget each quarter provides the room for making the adjustments that are needed. Where a company sticks with the practice of setting an annual budget, there are other practices that need to be changed. These are a major source of waste and they need to be plugged. As noted earlier, if by the end of the financial year a manager has not spent all the funds allocated to their department budget it is usual for this to be viewed not as a creditable achievement but as a reflection on their ability to plan ahead. As a result, they are likely to find that a knife is taken to their bid for funds at the start of the next financial year. It will be assumed that they are asking for more money than they really need. To forestall this damaging outcome, managers finding themselves with a surplus are wont to look for ways to shed the money, often by spending it, frequently on things that are not really needed. It must be obvious that this practice should be brought to an end, which means discarding the assumption that an underspend is the result of a lack of competence on the part of the manager. Where a manager has a surplus, they should be asked to explain the reasons. The sales budget, for example, may have been set to provide for the recruitment of extra salesmen. A sudden downturn in the market will knock the legs from under the assumption that underpinned the recruitment proposal. It is obvious that not spending the funds allocated for this purpose has been the right thing to do. When they bid for funds at the beginning of the next financial year it should be judged entirely on its merits. To discard both the practice of finding ways to shed a budget surplus and bidding for more funds than are needed will serve to plug a sizeable source of waste. Moreover, it will go some way to encouraging more honesty in these transactions, something that is often a rare commodity within the customary practices that attend the annual bidding process. Finally, the decision on how much is to be allocated to each department and function must never be left to the head of the finance department alone. The narrowness of the aperture through which finance directors and their staff survey the organisation makes it

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necessary for their parochial judgement to be counterbalanced by colleagues who have a broader perspective.

Setting Targets As already noted, it is a fundamental tenet of SAD that the sole source of targets is the budget. However, there is a mismatch between this piece of dogma and what happens in practice.

Top Targets Freedom to set your own targets is at the top, but in reality this apparent autonomy has limits. As has been seen, those in charge are hemmed in by the expectations of a raft of external interests, principally the investors and analysts. The key issue is this. Partly in response to these pressures, those at the top will have set corporate targets for the coming financial year, sometimes not really knowing whether they will be achievable or not. The options available in responding to this hard reality were reviewed earlier.

A Third Option There is a third option. As has been seen, it was applied in the case of Topbread, where a team of workpeople was invited to decide what their targets should be and then to seek the agreement of their managers. As events showed, this practice proved spectacularly effective. However, it does require some hard work on the part of those in charge. If they extend this practice of target setting to other teams, they need to ensure that the totality of local targets adds up to what the unit has to achieve. Resistance to all these ideas, especially the last, is to be expected from the adherents of SAD, usually represented by the staff in the finance department.

How to use Measures for Coordination, Planning and Control These issues are on a very different scale than those considered so far in this section. The apostles of SAD tell you that these goals are easily achieved – the reality tells a different story. They have frustrated the best efforts of many organisation chiefs. The fact that the typical span of attention of a chief executive is restricted to a few minutes on any one issue – the conclusion of the eminent Swedish academic Sune Carlsson (1953) – suggests the difficulties often encountered in trying to find a lasting solution.

Coordination As indicated elsewhere, this is the hardest goal to achieve. Those in charge should cease to measure the results of pursuing local goals: all the more so when these conflict with the core objective.

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The criteria for good short-term planning are: 1. Supporting the process chain. It needs to be recognised that the success of any plan

depends on the degree to which the motor that drives the process flow is insulated from the sources of description that impede its progress across the organisation. These sources must be pinpointed and eliminated. 2. Minimising response time. The SAD formula is ponderous and procedural: an investigation, a report, analysis (within narrow parameters) and a post-mortem. By the time this procedure has been completed the business may be listing in a sea of red ink. Clearly what is needed is not lengthy procedures but the flexibility that will enable prompt action to be taken. This may take the form of what is generally known as firefighting, which is the subject of the next chapter. 3. Reconnecting planning and execution. As reported in Chapter 2, an enduring legacy of Taylor has been the separation of the planning of work from getting it done. Some of the perverse consequences of keeping these functions separate have been reported, notably the measurable havoc wreaked at Vauxhall Motors. The closer involvement of people in the planning process can bring about measurable improvement. Norsk Hydro is Norway’s largest commercial employer. At one of its plants, located at Heroya, the unit chief and his associates introduced an ambitious change programme. Its principal aim was to reduce the chronic staff turnover which was undermining the performance of the plant. Its manufacturing process was manned by groups of workers, each with a supervisor in charge. Planning the work was the responsibility of staff located in a separate office. Their task was to analyse the work that had to be done, and use this data to establish a ‘normal peak load’. This was notional but workmen were expected to achieve this target figure. The planners ordained that each operator must work to this theoretical norm. The plan split work into isolated tasks. As a result, every time there was a surge in throughput – and this happened frequently – workmen often found it difficult to cope working on their own. Because each workman had been instructed to stick to his allocated tasks, his colleagues were not permitted to help him. They simply had to stand there and watch him struggle. When a surge occurred, it was usual for the group’s supervisor to ‘jump in’ and give him a hand. This practice had prevailed since the plant started some 30 years before. The change programme transformed the way that work was done. When a surge in work occurred, workers were now encouraged to help each other. The traditional rigid allocation of work to individual workmen was scrapped and the function of the planning office sharply cut back. As noted, because the planning office had previously allocated tasks to individual operators, a large part of the supervisor’s job was to help out those who were unable to cope because their colleagues were not permitted to help. It became evident now that the need for the supervisor’s role was much reduced. The results of these changes were measured: throughput increased, quality improved, staff turnover dropped sharply. It should be evident by now that there is a lot more to the achievement of the aims of coordination and planning than the doctrinaire advocates of SAD have supposed. The

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principal lesson that has passed them by is that the key to both is the measurement of the results of inadequacies in both fields – once again, measures that matter.

Using Measures to Restore Control I was due to have a meeting with Adrian, Operations Manager at Trapscan, a firm that that makes packaging materials. I had known him for a long time, having worked with him at his previous company. When we met, Adrian told me that the most pressing issue was the frequency with which plans got derailed. He had improved the measures available to calculate the results of this unresolved problem and the results were, he declared, ‘horrendous’. He told me what he was planning to do, which would start with a meeting with the eight managers who reported directly to him. He invited me to join the meeting. By the time I arrived, his managers were assembling in the conference room. Adrian began by explaining my presence, and that I would make some notes of the proceedings which would be sent to them within a few days. He then got down to business: ‘Gentlemen,’ he began, ‘as you know I have been here now for six months and I have called this meeting to discuss with you an issue that is causing me some concern. I have the feeling that we are not in control of events at this place. Plans seem to get derailed too often and as a result we are spending a lot of time putting out fires.’ Several managers nodded. Greg: ‘Speaking for myself, I seem to be doing little else.’ Adrian went on: ‘I would like to start by giving you a few figures.’ He had already written these on a flipchart, which he now displayed. Adrian resumed: ‘I have put together these figures myself. I can assure you they are 100 per cent accurate.’ The figures made grim reading. Expressed in money terms they included lost production and declining sales revenues. There had been a catalogue of customer complaints. It was clear that Adrian’s managers were startled. Mike spoke for them all: ‘I knew we were not doing well but I never thought the figures were as bad as this. We have got to do something and fast.’ Adrian: ‘Yes, it’s not a pretty picture. So we are agreed something has to be done?’ There was a chorus of assent. Hutch: ‘The trouble is, Adrian, we have been here before and we got nowhere. Your figures show that, if anything, things have got worse.’

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Adrian: ‘When you say we have been here before, Hutch, would you give us your version of past events?’ Greg: ‘It was when Percy [Adrian’s predecessor] was running this place. He got in some consultants and we were formed into groups … I forget the name they gave us …’ Alan: ‘It was “task forces”.’ Adrian: ‘So what happened, Hutch?’ Hutch: ‘It was called the top ten programme. We had to pick out the ten biggest problems, then prioritise them and we were supposed to meet every few weeks and solve them, one by one.’ Adrian: ‘So what happened?’ Greg: ‘We met a couple of times but – if I remember correctly – only a few of us turned up and it just petered out.’ Adrian: ‘Why do you think it faded like that?’ Alan: ‘Percy was a nice chap but he never followed up on anything. We just went on drifting.’ Greg: ‘It wasn’t just that. People didn’t turn up because they couldn’t spare the time.’ Adrian: ‘What was so important that they could not spare the time?’ Greg: ‘We were all doing what we are still doing. Putting out fires.’ Adrian: ‘So Percy’s initiative failed because you were constantly having to cope with emergencies?’ Mike: ‘That’s exactly what happened. And that is why we agree with you, Adrian, something has got to be done but we don’t want a repeat of what happened last time. It’s pretty obvious the way things are going that we haven’t got the time to make another big mistake.’ Adrian: ‘So we have to take a different approach from Percy’s. Anyone got any ideas?’ There was silence.

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Adrian: ‘You have already told me that Percy’s approach did not work. You began to look at what is going wrong but you didn’t get anywhere because you were swamped by things that had gone wrong?’ Greg: ‘That is exactly what happened.’ Adrian: ‘So I suggest we come from the opposite direction.’ Alan: ‘You mean start with the time spent firefighting?’ Adrian: ‘That is precisely what I mean. We can’t crack the big problems that have baffled people for years until we have got control. So the immediate task we have got is to cut the time we spend putting out fires.’ Alan: ‘I go along with that – it makes sense. But how on earth are we going to do it?’ Adrian: ‘Let me ask you this question. Off the top of your heads, how much time do you reckon you spend firefighting?’ Each manager came up with a figure. It averaged at 25 per cent. Adrian: ‘I suspect that your estimate is conservative. Never mind, I will take your figure. What does that mean in money terms?’ Hutch: ‘No idea.’ Adrian: ‘I make the figure £100,000 a year. That’s 25 per cent of the total salary bill of everybody in this room (I’ve left my own salary out to keep the figure down).’ (Laughter.) Greg (calculator in hand) asked him the figure for the salary bill. Seconds later: ‘That figure is right, lads. We can’t run away from this one. But how?’ Adrian: ‘Can I make a suggestion? In my experience you can’t make any decisions without data. I suggest we start to record the time we spend putting out fires.’ Mike: ‘You’re joking.’ Adrian grinned: ‘I’ve never been more serious.’ Alan: ‘But, Adrian, it will take too much time. You know we are pushed for time as it is.’ Adrian: ‘Yes, because as you have proved today we are all spending our time getting nowhere. We have to find a way of getting off this treadmill.’

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There was silence. Adrian was in the process of turning their world upside down It would take some time to sink in. Alan: ‘Adrian is right, lads. Nobody wants to do another Percy. Let’s give it a go.’ Greg: ‘I go along with that. But if we are going to do this we had all better do it the same way. We’ll need somebody to show us how.’ Adrian: ‘Let me tell you what I have in mind. I’m not talking about time and motion or any of that kind of nonsense. I want all of us to keep a record of how much time we spend dealing with emergencies. The figure can be approximate but I need to have it recorded. I myself will keep a record of my time as well. Before we start we will get together in a few weeks’ time and spend a day working out how best to do this. Later on when we’ve got some figures we will put a price on them.’ Greg (turning to his colleagues): ‘I think we are all a bit uncertain about this idea at the stage. But I propose we give it a go, lads. What do you say?’ There was general assent, with the exception of Hutch who, as a parting shot, said: ‘Let’s hope this is not another wild goose chase.’ The meeting ended. Adrian looked drained, his managers looked shell-shocked, but the atmosphere was positive. Greg, always the comedian, did a little jig as he made his way towards the door. When the door was closed Adrian looked at me and said, ‘Phew! Do you think it will work, Dave?’ I had no doubts.

What Happened Next Three months later Adrian invited me to return. He suggested that I talk with a few of his managers and then we should discuss the results later in the day. Greg and Alan were waiting in the conference room. Both of them told me that although they had been dreading the recording exercise and it took a long time to get used to it, it seemed to be paying off. Greg said, ‘It’s been an education. It sounds silly, but the big problem was sitting down with the figures I had jotted down during the week, then trying to decide whether what I had been doing had been firefighting or not. And if it was not firefighting, what was it? And is this what I should be doing?’ Alan took over. He explained that he had been running line 5 for several years. Last January he was given line 2 to run as well. He found that there was one piece of kit on line 2 that was slowing down the whole line. As a result it was running at 70 per cent of its recommended speed. His supervisors told him that the previous year ‘some Health and Safety “wally” from head office’ had carried out a risk assessment and decided that running it at full speed created ‘an unacceptable hazard’. ‘So,’ Alan said, ‘I phoned him

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and asked him to come down so that we could look at the equipment together. He did not seem that keen, but he did pay us a visit.’ Greg went on: ‘Before we looked at the machine we sat down for a coffee and I began by telling him that running the line at the current speed was costing us £87,000 a year in lost production. I showed him the figures. It seemed as though he wasn’t used to this kind of talk. So I suggested that we fix a date and make a video of the operation, then examine it frame by frame to pinpoint the hazard. He seemed to like the idea.’ Alan did not hear from ‘the safety man’ for a few weeks, so he phoned his office and was told that the restriction on line 2 had been lifted. Alan continued: ‘Now the problem for me was how to record this time. I went to Adrian and asked him was this firefighting or not. He told me that it was not firefighting, that it was precisely the kind of thing I should be doing and I got a pat on the back.’ Later that day when I sat down with Adrian he told me that when he and his managers compared the first results of recording time spent dealing with emergencies the average was in excess of 40 per cent. When they worked out the cost ‘they were poleaxed’. Subsequently, in three months they had got it down by close on 10 per cent. He went on to tell me there had been a noticeable reduction in the number of occasions on which things were not going to plan. He had not been able to get precise figures but the number of times he had been called on to intervene was down by 20 per cent. This had led him to conclude that firefighting had actually been feeding the disruption. They had decided that when they had got emergency handling down a further 10 per cent they would be sufficiently in control to start on cracking the big problems that had been the objective of Percy’s earlier initiative. ‘This time,’ Adrian continued, ‘we are doing things the right way round.’ As a vehicle for measuring performance SAD has weaknesses that it has been slow to recognise, let alone put right. It has to take some of the blame – though not all – for the fact that many organisations not only measure the wrong things but leave unmeasured some of what matters. An alternative model is needed to compensate for these shortcomings, and we will look at this in the next section.

chapter

6 A New Model – Productivity

In this chapter the advantages of productivity as a model are presented, highlighting the common ground it shares with the process chain which features prominently in these pages. It is a further aim of Chapter 6 to focus on areas of business activity that are key to survival and in which performance should be measured but where this often does not happen or is inadequate. These are the capacity to respond, to innovate and to make other improvements. Finally, it sets out the shape of the organisation needed for performance to be measured in these and other areas and shows how this reform will generate higher levels of motivation.

The Productivity Goal and How to Achieve it How Productivity Emerged as a Measure By the end of the Second World War, efficiency had got a bad name. It had come to stand for Nick the knife, the ruthless cost-cutting employer. In the search for a blander word that came without a history, the new name, productivity, made its entry into the business vocabulary. Shortly after the war had ended, the British government decided that this country had much to learn from US industry, the superiority of which had been spectacular during the conflict. Productivity working parties were formed, consisting of representatives of industrial managers and trade unions, who visited the USA in the early 1950s. This was the precursor of what has become a long series of pilgrimages to countries seen to be successful: after the USA came Germany; more recently it has of course been Japan.

The Productivity Formula Its essence is a simple model. At the core is a process which is seen to start with an input (a resource such as materials) and to terminate with an output which may be a manufactured product or a service such as the issuance of an insurance policy. Central to the model is what happens in that part of the process that converts inputs into outputs.

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Process as Supply Chain The connection between this formula and the process chain, which was the subject of a previous section, is obvious, but its influence spreads much wider. The concept of productivity comes in a number of different guises. Few ideas have wider currency at the present time than that of the supply chain and the need to ‘manage’ it. (The practice of farming out work, better known as outsourcing, has added to its prominence.) The influence of the process is evident. Take the following definition of the supply chain: Supply chain management is the management of a portfolio of assets (human, equipment, components, etc.) and relationships (customers, suppliers, staff, etc.) to transform a customer’s product from raw material to a finished product as efficiently possible (www.electronics.net/ glossary.php).

It is worth noting that while, as will be shown, most aspects of productivity lend themselves to measurement, the capacity to measure improvements in supply chain management is less clear-cut. Optimum gains in productivity are unlikely to be secured without a strategy.

The Productivity Goal In recent years the productivity formula has been seized on by the champions of the doctrine of ‘lean management’ who have popularised the slogan ‘more from less’. This has been the distinctive flag that has served to indicate the location of the territory to which they have laid claim. It is an idea that many managers have found attractive. However, for those who find themselves grappling daily with some of the issues that have been explored in these pages, it may seem an overly ambitious objective. Getting more from what you already have may be seen as a more attainable goal. In an ideal world a unit chief should be able to look at the required outputs and call up whatever resources are needed to match it. The reality is often very different. To achieve the required result you have to make the best use of the resources you have. This may include people you would not have selected had you been given a choice and, in the case of factories, equipment that has already exceeded its lifespan. This is a scenario that many unit chiefs will readily recognise.

Getting Behind the Hype and Being Clear About Concepts Having made a decision on this fundamental issue, you can move to the next stage. The principal requirement is clear definitions, for without these it will prove difficult to measure achievement. You need to specify the following:

• the outputs (result) required in terms of measurable quantity, quality and time that must be made available;

• the resources that are essential to produce the required result;

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• the criteria to be applied in measuring the process for converting inputs (resources) into outputs.

Specifying the Outputs Specifying the outputs required brings you back to the land of targets, with all the issues that have been considered earlier. The theory serves to remind you that the specification must be precise, otherwise you cannot decide the inputs (resources) that will be needed. However, the theory is diluted by the realities of running a commercial organisation. As has been noted, those in charge of corporations are sometimes compelled by external pressures to specify a result required without being sure they have the inputs available that are needed to achieve them.

The Risk of Obscure Outputs Being clear about the result you need to achieve may seem to be obvious enough and in many cases it presents few difficulties. Even so, it is not always free from problems. Take the assembly of a military aircraft. At the start there is a specification of the product that is issued by the client; in the case of the UK this is of course the Ministry of Defence. However, as the production process gets under way officials within the Ministry, sometimes responding to civil service officials, often begin to issue orders for modifications to be made to the original specification. These modifications (known as ‘mods’ in the trade) may run into hundreds during the period when the aircraft type is being built. As a result, on completion the exterior of the finished product may look very similar to that on the original blueprint but behind it there will be a host of dissimilarities. Over a period during which there are so many departures from the original specification, it is evident that these will make a substantial impact on the level and type of resources required. Moreover, the effect of so many modifications to the original specified output may make for difficulties in the measurement of productivity. Where the product is precisely the same or sufficiently close to that specified, such problems are unlikely to be encountered.

Specifying Resources As already noted, the issue of resources can be enveloped in a dense cloud of hype. One result of this may be that things are not what they seem to be. Before producing a new model it is usual for car makers to apply a practice called ‘retooling’. This does not mean slinging out all the existing equipment and replacing it, as is sometimes supposed. Most retooling consists of modifying existing kit, enabling you to make better use of what you already have – all of which puts a premium on ingenuity in devising better methods. What is essential is to spell out the basic minimum without which the required result is unachievable.

Specifying the Conversion Process This is also essential, otherwise there will be difficulties in measuring productivity. However, this is not always done adequately. As will be seen shortly, the formula most

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widely canvassed for tracking the process of transforming inputs to outputs is flawed because it does not lend itself to measurement. As a result this calls for a more pragmatic model.

Getting the Right Resources The resources you will need will be determined by the output that has been specified. Making sure that you buy neither too little nor too much for the purpose can be a demanding task, the more so if, as often happens, the specification for the product (output) is changed while it is in the process of being made. However, the promoters of the idea of lean management – currently in high fashion – have a lot to say about inputs, including the injunction to reduce resources to the bare minimum. Its apostles are not strong on definitions: the closest you can get is ‘Lean has been called lean because it uses less of everything: less space, less inventory, less people and less time’ (Bicheno 2000). How long, you may ask, is a piece of string? Some of the consequences of cutting spare parts (inventory) have already been observed.

What is Meant by Resources When managers talk about resources the meaning is usually restricted to materials. Although in recent years departments previously known as Personnel have been retitled Human Resources, this is simply a rhetorical flourish. People are generally not perceived as a resource; it is still more common to view them as a source of unavoidable cost that has to be incurred to get the result required and the custodians of SAD are unlikely to disagree with this interpretation. For a brief phase in the 1980s the impending demise of the human factor in manufacture was widely predicted. The accelerating circulation of the idea of the manless factory engaged some organisation chiefs and countless business observers. It was fuelled by images of robotic devices and the notion of ‘automation’. This beguiling idea wilted under the weight of a more realistic appraisal of its feasibility and as the downside began to sink in: notably that new devices often reduced flexibility just at the time when it was becoming clear that the marketplace was putting a premium on the capacity for swift response to changes in demand. The outcome of these popular but short-lived flights of fancy has been a picture in which people are still there, albeit in smaller numbers. Yet if you take the full spectrum of organisations in both the private and public sectors, the one common resource they all share is people. The proportion of assets these represent in terms of numbers or cost varies widely. In accounting terminology these will be classified as more or less ‘labour intensive’. In a modern oil refinery the people employed account for a small proportion of total costs (typically 10 per cent or less). Enter the portals of a large hospital and you instantly witness something akin to a human anthill. (It should come as no surprise to be told that the NHS is said to employ more people than any other institution except for the Chinese army.)

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The principal resources of a hospital are people and equipment, much of which is costly to buy and maintain. Move to businesses in the service segment such as insurance and finance, and to the public services, and of course people are the predominant resource.

Ernest – the Delayed Arrival of Recognition Ernest worked for a company making products from a material called carbon. During visits to the factory when I passed his small, rather bare and dusty office, with a floor of worn lino, in which he sat dressed in a fading suit that had seen better days, Ernest and I often chatted. I knew that Ernest spent a lot of his time talking with customers and I assumed he was dealing with queries that were routine. One day when I was taking the same route he was not there. It was occupied by a young man in his early thirties. In answer to my question I learned that Ernest had been a casualty in a recent redundancy programme. I asked the young man – Patrick – whether he was taking over from Ernest. Patrick told me that he was expected to add Ernest’s previous tasks to his own. While we were talking the phone rang and it was evident that he was having problems in handling the call. Patrick then explained that customers used to phone Ernest, explain how they were planning to use carbon in a product they were making and they would ask him what grade of carbon they should select. Patrick added: ‘You are not going to believe this, but Ernest is the only person in this place who had this knowledge. We have some relevant technical literature but it is no help to me. It is now clear to me that it was all in Ernest’s head: he was a walking encyclopaedia. Now we can’t give the customers the advice they need: they must be going elsewhere. And once they have gone they won’t be back.’ It is not unusual for companies to shed people like Ernest without being aware of the contribution they are making. As a rule those in charge and the managers they employ have a limited grasp of the knowledge and skills needed to execute the basic tasks that keep the organisation ticking. Just what this essential information is will be revealed only after people like Ernest have departed. The kind of records a company keeps about the people employed are usually limited. When, having gained permission, I was able to check those of Ernest (they were still there), it listed his address, date of birth, length of service, job title and salary details. That was it. This sparse information is typical of the records kept about most employees. If it is the intention of those in charge to make maximum use of their resources in terms of people they need to ensure that they have adequate intelligence about the many Ernests they currently employ. Many of those in charge have a long way to go before they can be sure that they have what they need to get the required result. This lack of knowledge on the part of those at the top can add to the difficulties they face in deciding just how much can be achieved by the organisations in their charge. Establishing what people like Ernest are actually contributing should be a start.

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Conclusion The resources (or inputs) required are anything needed to get the output that has been specified. This is the only limit. It can be materials, buildings, land, computer software and people. Once you have acquired the resources, it is vital that you know what you have and what contribution it can make. Self-evident, you may say, but as the case of Ernest showed this data is not always there. The objective during the conversion process is to raise the level of productivity, making optimum use of resources, minimising waste and measuring gains (or losses) that have been made as a result. The model for which the widest claims have been made for achieving this purpose is the value chain. However, the problems associated with the concept of value which have been examined (in Chapter 1) should be sufficient to put you on your guard in assessing its merits – and with good reason.

The Notion of the Value Chain The value chain is best described within a factory context. As a product passes through the sequential stages of the process of manufacture, value is said to be added automatically – or it should be. You are told that in any process chain all activity can be divided into two kinds: those that add value and those that do not. You are advised to weed out the latter by carefully mapping the value chain, peering into every nook and cranny to flush them out. Many have succumbed to the attractions of this idea. Sadly, its foundations are built on quicksand. The weakness of the value chain is that it does not lend itself to measurement. At no stage can you put a price on the value said to have been added. Take the homely example of making a loaf of bread. It enters the front end of the process as flour. The first stage is to mix the materials to make dough and then cut it into dough pieces. It has yet to go through a number of further stages before the completed product can be enveloped in plastic material ready for display on the supermarket shelves. How much value has been added by converting flour into a dough piece? The answer of course is that no added value can be identified. Its condition can be described as material that is partly processed from which a loaf has yet to be made. The same applies to whatever you are making. The only value of a partly assembled motor car is the price the parts will fetch as second-hand items. This of course will be a lot less than what the car assembler has paid the suppliers for them. So as an item traverses the process chain no added value can be identified. But turn this idea on its head and you get a different picture. As any product moves from one stage to the next, costs are accumulating. There are the costs of the material and energy consumed; those of the people needed to man and repair the equipment, and these costs can be counted at each sequential stage. So the conclusion has to be this: you can measure accumulating costs but you cannot measure value said to be added. There is in fact no value chain. You can only know for certain that value has been added when what you have made attracts a buyer who is prepared to pay the price you are asking and money changes hands. But then what if you make it and nobody wants to buy it?

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This was the case at Rolls Royce Aero Engines in 1971 when they made an engine (the RB11) that an insufficient number of aircraft makers were prepared to buy. The company was bankrupt and was bailed out by the government of the day. It is also a painful lesson that American car makers were slow to learn as they were forced to sell off thousand of cars so cheap that they barely covered the costs of making them. When this happens, of course, value is not added: it is subtracted. As a model for measuring the process of transforming resources into a specified outcome the claims made for the value chain do not survive scrutiny. It is time to consider a more pragmatic model.

An Alternative Model The purpose of our alternative model is to establish a better way to measure the efficacy of the conversion process. This is what needs to be done:

• Avoid specifying outputs that are not aligned with the corporate goal. • Reduce disruption in the process chain and the time spent handling the emergencies that result.

• Improve short-term planning. • Increase the number of people receiving data needed to measure their performance and to show them what needs to be done.

• Increase the speed with which corrective action is taken by those best placed to take it.

• Minimise measurable waste.

Specifying the Right Outputs There is no point in seeking to measure the process against yardsticks set out below unless the output targets are the right ones – that is, they are in alignment with the corporate goal.

Outputs to Avoid Specifying the wrong outputs is not unusual. Amongst the most common are:

• giving undue weight to numbers; • seeking short-term outputs at the expense of longer-term results; • going for numbers. As already observed, the adverse consequences are too obvious to need elaboration. The most likely casualty is quality. In the factory context it risks adding to the waste that is created. In the hospital environment there is ample evidence to show that giving undue prominence to numbers has jeopardised patient care and in some publicised cases raised mortality rates.

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Going for the Short Term As has been reported earlier, the influence of City-based sages on the targets set by company boards, plus the practices used to make bonus payments to directors, have moved them to focus on short-term results. The importance accorded to short-term results has not gone unnoticed at lower levels in the organisation. Take the case of Trevor.

How Trevor Went for Broke Four manufacturing units belonging to the same company share the same site in the East Midlands. Competition between the managers of the four units to get the highest level of productivity was encouraged. Over a two-year period Trevor appeared to came out on top of the productivity league. Shortly afterwards he was promoted. When Bernard was appointed to succeed him, Trevor’s former manager said to him, ‘You might find that Trevor is a hard act to follow.’ Bernard was soon to find that this remark had a different meaning from that he had initially assumed. Within a short time after his appointment his unit was plagued by frequent equipment failure. It became plain that Trevor had achieved his results by taking all the short-term devices at his disposal – and these included neglecting machine care. As Bernard ruefully observed, ‘It’s going to mean overhauling some machines and my output figures are going to take a big hit. I can’t get my manager to understand the reasons. Trevor is still the blue-eyed boy.’ Because he had been elevated to a position at a higher level in a different division he was not there to take the rap. But it was not only his successor who lost out – the company suffered a double whammy. For Trevor, having inflicted damage at one level, had moved on to apply the same formula at the next. The fault of course lay with Trevor’s manager. If he had been up to the job and demanded the data needed to closely monitor Trevor’s performance he would have smelt a rat from the start.

Improving Short-term Planning As has been made clear, both the costs of bad planning practices and improvements that may be made are often easily measured.

Reducing Disruption The costs of disruption are usually measurable: so are the effects of making improvements.

The Collection and Distribution of Data As will be made clear later, it is feasible to assess the effectiveness of whatever system you have for the distribution of data. Key measures are to identify the number of people who do not regularly receive the information they need to assess their performance and, where they do, to determine whether it is in a form best suited to serve this purpose.

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Getting Speedy Corrective Action As previously reported, fewer changes bring more benefits than distributing the capacity to take corrective action to those best positioned to apply it. The obduracy of the resistance to this reform has been illustrated by past events at Silentbloc. Any business or unit chief who can see the advantages of getting swifter remedial action will have to confront the need to make changes in the way work is organised.

Extending the Scope for Ingenuity A major ingredient in the mix of factors that determine the performance of transforming inputs into outputs is the ingenuity of the people who are part of the organisation. As will be seen shortly, there is no one group that has a natural monopoly in this respect and the results of applying these talents are invariably measurable.

Minimising Waste Concern about waste began with the usage of materials used in producing a planned result. It was in manufacture that the term was first widely used. Different industries have their own words for it. In engineering it is ‘scrap’. In the manufacture of plastic and rubber products the word is ‘flash’. ‘Spoilage’ is the term used in printing; in paper making it is ‘broke’. Yet as far back as Taylor the term was not restricted to materials alone. Amongst his interests was the reduction in effort which in his eyes could only be achieved by establishing the ‘one best way’. The aim of minimising waste has received a powerful impetus in recent years as a result of the influence of what are understood to be Japanese industrial practices – of which the best known is waste elimination. This has opened a door to more ambitious ideas. Some have been peddled as patent remedies, said, for example, to ‘squeeze out’ waste from every part of an entire organisation. The difficulty is, however, that the more extravagant the claim, the harder it is to measure the results of its application. A prominent feature of Japanese waste elimination programmes has been the involvement of the people who execute the basic tasks: those in charge sometimes do not realise is the intensity of the distaste of people at this level at what they perceive to be waste. Now, where this sentiment is entrenched, there are two possible explanations. First, that their judgement may be justified by the facts. Alternatively, there may be good reasons for what they see to be wasteful expenditure, in which case their seniors in the organisation have omitted to explain its purpose.

What to do About Measurement of Waste A common shortfall on the part of some who have made the issue of waste their concern is to treat it as a single self-contained item. Benefits are to be had from taking a wider perspective. Waste of resources is not restricted to any one area of activity. It can surface

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anywhere within an organisation and in many different forms. Take events which disrupt the process chain. These are a common source of waste of resource and they often occur on a grand scale. Yet as has been reported, the effects of these are not always measured. The rules are simple: 1. In seeking to make the best use of resources, discard any restrictions in the search for

waste, bar one: to ensure they can be measured. 2. Next, when it has been measured, convert the figures into money terms so as to

make plain to all concerned the true cost of failing to make the best use of corporate resources.

Conclusion It has been the purpose of this chapter to review the measures available for calculating the productivity of the process of transforming inputs into outputs. Having concluded that, sadly, the idea of the value chain is not suited to this task, an alternative model has been presented which provides a better instrument for comprehensive and accurate measurement. There is one more factor which has an impact on the efficacy of the process of converting resources into the required result – the decision as to where the work should be done. Should it be executed by people you directly employ or should you get it done by others who work outside? This is the question that is considered next.

Home or Away: the Truth about Outsourcing In getting maximum gain from converting inputs into outputs a weighty factor can be the decision as to who is to do the work: the people who work for you directly or those employed by somebody else? Where work is handed over to be done by people employed by an outside agency it is nowadays said to be outsourced. In weighing up the pros and cons there is one factor that cannot be ignored: outsourcing will succeed only if it is preceded by a strategy. Without this you may come unstuck, as will be shown shortly. Devising a strategy brings those in charge face to face with the need to determine what activities can be safely divested and what cannot be handed over for others to do. Mistakes can be costly. J. Sainsbury, the supermarket chain, was losing customers. One of the reasons was plain to see. The absence of products on display on the supermarket shelves left a lot of gaps. Customers were not finding what they wanted. It was at this time that a new chief executive arrived. He was quick to spot the cause. His predecessor had outsourced the company IT system and the flow of data was too sluggish in supplying information needed to identify what was required urgently to refill the shelves. The IT system was brought back in-house. Within a few months of the transfer, shelves were fully stocked again and shoppers were returning. Before any activity is outsourced it is essential that the proposal should be preceded by a rigorous analysis, which includes the capability of the prospective contractor to

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deliver the service required. This should establish not only the expected benefits, but any potential risks. This initial spadework was missing at Dawes. Dawes Fluid Systems is an old established firm situated on the fringes of East Anglia making components for systems that transfer fluids. It is part of a larger company. Dawes had performed well for many years under a popular and effective general manager. On his retirement he was replaced by Simon, a young man recruited from outside where he had held a senior job in marketing. Within a few months of his arrival he announced his determination to ‘drag Dawes into the twenty-first century’. The main product was made by about 50 operators, most of them elderly with long service. In a presentation to the board of the parent company Simon proposed that manufacture be outsourced – transferred to a factory in the Czech Republic. The reason, of course, was to reduce employment costs. Simon told board members that he had taken a ‘long hard look’ at the production operation (in fact a brisk walk around the workshop taking all of 20 minutes, according to onlookers) and had concluded that the work required minimal skills. In words that would come back to haunt him, he concluded the work ‘could be done by monkeys’. Simon’s estimated cost savings persuaded the board to back his proposal. Within a few months the 50 operators were made redundant. As the local operation was being run down the first shipment arrived from the Czech factory. To the consternation of Simon not one of the components delivered matched the specification. Thoroughly alarmed, Simon took the first plane to Prague. He returned bearing assurances that all problems would be resolved speedily and that the next shipment would be 100 per cent. In fact when it came it was less than 30 per cent. Subsequently, although the quality of products that were shipped slowly improved, the number of rejected items still outnumbered the good ones. Hastily, arrangements had to be made to get the missing components made within the UK. Because of the urgency of the orders placed, premium prices had to be paid. During this time of course concern at the parent company was mounting. When the problem with the shipped products began Simon had told his masters at the centre that these were just a few teething problems. Three months later these excuses were wearing thin. The shortage of components that matched the specification were the cause of badly delayed deliveries and many of these contained fewer items than the number ordered. Some customers cancelled their contracts and went elsewhere. It was a full year before things began to regain a measure of normality. Well before this time Simon had packed his bags, to be replaced by the most senior of the local managers. When it came to measurement of the results of Simon’s flawed project, the picture was this. It was over a year before the benefits of the reduced employment costs began to appear. By that time the damage sustained included the loss of five customers, including the biggest, and the extra costs of components manufactured in the UK. Now, these costs could not be identified in the year end accounts of the parent company, of course. They were submerged in a deep sea of corporate figures. But the managers at Dawes had been doing their sums. They reckoned the cost at around £1.5 million. As one of them quipped ‘you could hire a lot of monkeys for that kind of money’. One consequence of the absence of a strategy to guide the practice of outsourcing at Dawes was the absence of a provision for an alternative source of supply in case things did

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not go as planned. Other companies have fallen into the same trap. The most well-known is the ‘world’s favourite airline’ – British Airways, BA. In common with many other carriers using Heathrow, BA had outsourced the provision of in-flight meals to a caterer that specialised in providing this service to airlines. This firm – Gate Gourmet – was owned by an American company that had been acquired by venture capitalists. The American manager put in to run the UK operation, who was an ardent adherent of the practice of confrontational management, broadcast a message over the company tannoy telling the workers who were taking their lunch in the canteen that many of them were to be sacked that day. This sparked a walkout that was quickly joined by the baggage handlers who serviced BA planes. As a result, for several weeks BA’s services were disrupted by frequent cancellations. Many of those passengers who were able to get away arrived at their destinations without their luggage, having completed their journeys sustained by improvised meals. The reputation of the world’s favourite airline took a knock. Although BA never made public the cost of this disastrous episode, educated estimates appearing in the better broadsheets put it at around £3 million. The experience of BA, like Dawes, reveals the risks of outsourcing without an adequate strategy.

The Strategy you Need A strategy should meet the following criteria:

• The case must be made for outsourcing and the benefits that will be gained must be spelled out.

• It should examine the potential downside, making a clear statement of any risks involved.

• It should provide for a rigorous assessment of the capacity of the service company to provide what is required and should set out the measures that the company will use to assess the performance of the service company. • It must spell out the measures to be taken to ensure that company staff have the necessary skills to control the work that has been farmed out. • It should make clear the arrangements for the transfer of activity to the service company. • It must provide for alternative sources of supply in case the contractor fails to deliver the service to the agreed standard.

Measuring the Results of Ad Hoc Services There is an aspect of outsourcing that calls for closer scrutiny than it often receives. This is the growing trend to call on outside agencies to provide specific services best described as ‘ad hoc’ in order to distinguish them from those examined so far. What matters here is the scale of the activity. The instances that have been reviewed so far have been at the top end, for example where a company may hire an external service provider to run its IT operation. At the lower end of the scale a firm may hire in an external provider to deliver training for a particular group of staff such as middle managers or people who are in regular contact with customers.

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The practice of buying in ad hoc services has grown rapidly in recent years, nowhere more markedly than with training. In the past many British companies sported large training departments, some employing up to 50 or so staff. Few of these remain, although there are American, Canadian and a small number of European firms that continue to keep this service in-house. As has been noted, the availability of such services internally has not always been appreciated by company managers who have sometimes been authorised to hire the services of an outside provider as an alternative resource. In the UK nowadays the absence of such internal services has often left those in charge with little choice: they have, willy-nilly, to go outside. This should provide a potential advantage that was previously absent. When services were available in-house it was often difficult to measure the contribution they were making. Buying in a service makes this easier, for at least you know what it is costing you. All that you have left to do is to calculate the benefits you are receiving. However, in practice this is easier said than done. If you stick with services in the shape of training, the difficulties are apparent. What may come as a surprise to some is what little research is available. This clearly raises questions over the accuracy of the popular image of the hard-nosed business chief with a tight grip on the corporate purse strings. It is worth considering to what extent the results of training lend themselves to measurement. At the level of the basic tasks it usually is measurable. Welding is one of the best examples: there are a number of levels of skill, each of which is clearly identified. Having been trained, you either reach the required level or you don’t. However, move away from the basic tasks and the opportunities for measurement diminish. Reference has already been made to leadership training for supervisors and managers. As yet no means of measuring the results have been discovered. The same applies to most other forms of training made available for all other than those employed to execute the basic tasks.Yet in national terms the money shelled out most years for unmeasurable training runs into many millions.

How to Make Sure Results are Measured What can the head of an organisation do to reduce the risk of securing no return on money spent on training? They should:

• prepare a precise specification of the service to be provided and the results to be achieved within specific period of time;

• set out the measures that will be used to assess the results.

Interpreting Results On a recent occasion my colleagues and I were working on an assignment within a company. At the same time another group of consultants were engaged in providing another service at the same site. The purpose of both was to improve performance. When the time came to measure the results, it was clear there had been a significant improvement in performance, but it proved difficult to determine which contribution deserved the credit. The moral is plain: your measures need to be of the quality required to ensure that where there has been an uplift in performance the reasons are crystal clear.

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Measuring Changes in Productivity How you measure gains or losses in productivity depends on your goal. As noted, a fundamental choice to be made is between making more from the resources you already have and the more ambitious objective of making more from less. Standard accounting doctrine has not ventured into the territory opened up by these alternatives, it has stuck with the aim of least unit cost and that of efficiencies. So its purpose for the most part has been to get the same from less. Its concern is with reducing inputs (resources). It has displayed less interest in outputs: its attention to the process of converting resources into results has been restricted to that of executing plans. This narrow focus has done little for the image of those charged with the application of standard doctrine. It is often seen to be simply taking a knife to costs. But to be fair, accountants are not alone in taking this approach. There are business chiefs, especially those of the macho persuasion, who have made a virtue of applying a tactic often described as ‘slash and burn’. These have sometimes used some of the tenets of accounting doctrine to legitimise their actions. The principal plank of any orthodox programme of cost reduction is to shed people. There is a simple calculation that lies behind this policy. The financial results of shedding people are quick to show up on the balance sheet. This tactic fits in neatly with the wider policy of pursuing short-term goals. It also has the disadvantage of producing a blinkered perspective.

A Question of Perspective The difference between the model of efficiency as promulgated by the champions of SAD and that of productivity is the extent of the perspectives they offer. As has been observed, that of SAD is limited, with a close focus on reducing resources (inputs). That presented by productivity is incomparably wider, and moreover it provides more scope for measuring gains and losses. As a result, while in practice accounting doctrine may be restricting its programme to cutting costs, productivity can offer a wider range of options. Many of these items – individually or collectively – may exceed the value derived from cutting jobs and the people employed to do them. As has been noted, accounting practice does not give as much attention to the question of waste as you might expect. Yet this is the way that many of the issues central to productivity are best described and they can have a huge impact on corporate performance. Substantial gains were made by Adrian’s strategy for dealing with the emergencies caused by frequent disruption to the process chain. Similar improvements are to be had by better planning. Consider also the benefits to be gained from permitting corrective action to be taken by those best placed to take it. Add to these the wider gains available from improving the capacity of a business organisation to respond to external demands. In each of these areas of activity the effects on performance are measurable. None of these calls for cutting resources. There is another issue that can be caught in the productivity net but which has escaped the notice of orthodox doctrine: the pursuit of divergent local objectives at the expense of the corporate goal. As the cases of Hi-wire and Akwa indicate, the financial consequences of permitting performance to be judged

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at local level can be substantial and are eminently measurable, as Eddie at Akwa was able to demonstrate.

The Measurement Infrastructure Because standard accounting doctrine has put administrative departments restyled as cost centres at the heart of its measurement calculating machine, this has determined the places where performance is assessed. But because these units are each saddled with their own budget, this creates a high risk of measuring the wrong things. There is a hazard that a department manager will see their achievement in terms of balancing his budget as an adequate measure of its performance. This, however, will tell you little about gains in productivity. On the contrary, the productivity model enables measurement to be made at each stage of the process. These have obvious advantages in registering productivity gains, especially in the application of better methods.

Conclusion The purpose of this chapter has been to demonstrate the versatility and flexibility of the productivity model in measuring corporate performance. These have been contrasted with the more limited scope provided by the traditional model. As has already been observed, the productivity model has the power to unlock doors that offer a wider perspective; these include the capacity to respond to external challenges. This is the subject of the next chapter.

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chapter

7 Spreading Measures

This chapter takes a closer look at how to measure response, innovation, improvement, results and motivation.

How to Measure Response I vividly recall a meeting of senior managers at BTR, a company for which I worked, at which I was present. Bill Scott, the managing director, was in the chair. He was not a happy man that day. We were each handed a copy of an enquiry received from a customer, asking whether the company was prepared to provide him with a large number of products that were similar to one of those we routinely advertised: it would mean of course that this would not be a standard item: it would have to be modified. However, it was a very large order. It was clear that the sales enquiry had gone the rounds. It had passed through the hands of five chiefs – or those of their deputies – each in charge of a different product range. Each one had in turn scrawled his response on the piece of paper, indicating that the enquiry was ‘not mine’. The document had come close to disappearing into the company’s Bermuda triangle. By the time the enquiry reached the desk of the managing director, the order had gone elsewhere. No wonder Bill was unhappy. During the tirade that followed, the managing director’s chieftains sat glumly absorbing the flak. Eventually he stopped. Waving the piece of paper in the air, he wearily put the question: ‘Why did this happen, and how can I be sure that this will not happen again?’ There was no reply. Bill was right to ask these questions. But two key issues were: (1) What had he to do to make his managers respond and act instead of passing the buck? (2) The other question should have been: when managers fail to do what it is evident that they should, it will impact on performance: hence the need to ensure that when things were going seriously wrong there was a system that would alert him to the danger signals quickly enough for him to be able take remedial action.

Inert Managers The source of the problem that Bill was faced with was a condition widely known as inertia. For chief executives like Bill a prominent manifestation of this condition was the apparent inadequacy of his managers in responding to the evident need to act. Inertia has figured on a number of occasions in the preceding pages. The ubiquity of this malaise has been widely recognised for some time and as yet it has resisted the application of patent remedies peddled by salesmen. What neither Bill nor his managers

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realised (myself included at that time) was that there was no solution so long as he was hamstrung by an unreformed organisation. In reviewing the options available for monitoring the response of a business organisation, there are advantages in traversing the process chain from start to finish. It is at the entry and exit points only (sales and delivery in the commercial context) that there is a direct interface with the marketplace. As many of the events calling for a response spring from this source it is important to monitor closely the quality of the response from these two stages in the process chain. Any organisation chief will be well aware that a ready response is more likely here than at the intermediate stages in the process, which tend to be inward-looking. A key element for any business is how long is the period of time that separates the placement of an order from delivery, referred to in any business that makes products as the lead time. Because it is a major factor in competing for business (with a potential customer asking ‘When can I expect it by?’), minimising lead times is invariably a key objective. This requirement can also be a source of problems. The further any stage of the process chain is from direct contact with the customer the harder it may become to engender the required sense of urgency.

The Front End This is the stage at which enquiries are received from a potential client and where orders are received. Salespersons may share in this activity where they secure an order or – a less common event – clinch a deal. The measure of response should include the number of orders placed, their value, the number of enquiries and also the proportion of enquiries that convert into orders. Similar measures may be applied to salesmen where they secure orders directly. Other measures may be the number of orders secured in relation to the number of visits made. The value of any order received has also to be taken into account. However, when measuring the results achieved by salesmen there is a caveat. Those in charge need to act judiciously in applying these measures to reduce the risk of the customer being sold something that does not match their requirements – not an uncommon occurrence, as evidenced by past events in the insurance business.

After-sales Services Where a company deploys staff to service and repair clients’ equipment on their premises (a trend that has been reinforced by the practice of outsourcing), it needs to monitor their work. What needs to be known will include:

• time taken to respond to requests for service; • length of time taken to complete the work; • the number of occasions when assistance is requested (to repair equipment that has been serviced or repaired within the previous six-month period);

• the reasons for any delays in getting work done; • the cost of spare parts used; • the extent to which this work was covered by warranties.

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Some firms complement the data acquired in response to these questions by surveys designed to assess the level of satisfaction with the service provided.

Making Things The distance that separates the function that makes products from that which sells them varies widely. At one extreme is a small factory where the sales office is located within the same building where goods are made. At the other end are firms that process vast quantities of materials, be they oil or foodstuffs. In the case of the latter, the contact between the producers and the market is restricted to visits by supermarket representatives who check aspects of the manufacturing process. The further the manufacturing function is insulated from the outside world, the more essential for the business or unit that the chief keeps beady eye on the way it performs – a task made more taxing by the growing trend of outsourcing (see Chapter 6). Manufacturing chiefs have long yearned for a return to a golden age in which customers were prepared to fork out money for a standard product, their equivalent of a black model T Ford motor car. It is a mindset that eventually led to the collapse of two of the American motor car makers in 2009. It has become increasingly clear that what is nowadays required is the converse. Customers demand diversity, which means making small quantities (or batches) of different products. To make small batches you need to reset machines as you switch frequently from making one product to the next. This activity takes time and adds to costs. Business and unit chiefs need to watch the figures closely: this they do not always do. The scope offered by a focus on reducing the time needed for changeovers was dramatically demonstrated by Saichi Ohno, a senior engineer at Toyota. A key machine in making car parts is that which stamps out side panels. When Ohno paid a visit to Ford’s main plant at Detroit, the time taken was 12 hours. Returning to Japan he gradually – step-by-step – whittled it down to three minutes. Obviously changes on this scale call for a complete revamp of the entire manufacturing process: otherwise other machines will be unable to keep up.

Delivery As every parent knows who has ordered gifts for their children for Christmas, as the festive season approaches a promise to deliver on time is of crucial importance. Few will be surprised that evidence suggests that frequent failure to deliver by the date agreed in any business sector accounts more than any other reason for the loss of customers. Hence the business chief needs to keep a close watch on this aspect of corporate performance. A bad record on delivery is almost as damaging as failure to respond at all. Where the arrangement is for the customer to collect the item ordered and he goes to pick it up, it is not unusual to find that it has been given to another in error. Where this happens there will be reluctance on the part of staff to report this mistake and the chief is unlikely to hear about it unless the customer complains. Because money will be refunded to the disappointed client, it is the record of these that may repay scrutiny.

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All the more important, therefore, that there is a system in place which will record it. It will also give them the opportunity to ensure that as much as possible can be done to make amends. Where the arrangement is for a product to be delivered to a customer there is still a risk that things will go awry. My colleagues and I were conducting an assignment at Limitex, a company that makes pumps. When we received our initial briefing from the chief executive he told us that ‘things were not quite right’ in the department that stored pumps but he was not sure what the problem was. It emerged that 30 per cent of the pumps delivered to clients were lacking at least one part and they were having to wait for up to a month for the delivery of the missing item. One consequence was that the drivers who delivered the incomplete pump had the unpleasant task of conveying the unwelcome news. There was no record kept of the number of incomplete items delivered. When this omission was remedied with data reported regularly, within three months the problem disappeared.

The Limits on Response It is a commonplace that the destination of any business that lacks the capacity to respond to the demands of the market place is oblivion. However, this must not be done in such a way that the supplier loses out. It is an ever-present risk, as evidenced by the two episodes that follow.

The Hazards of Excessive Zeal Limitex, the pump maker to which reference has already been, made, is part of a large USowned multinational. It is market leader in its field. When an order had been received, within the space of 30 days the company had to order the parts for a pump and get them made at one of its factories – located in Scandinavia – then deliver them to the UK site. This time frame was regarded as tight and caused serious problems at the delivery end of the process chain. Because he had reached the top job via the sales route, you would have expected the business chief to keep himself informed about the performance of the sales office. It became apparent that this was not the case. During an assignment a colleague and I found ourselves seeking to trace the cause of disruption to its source. In our initial briefing we had been told that there were ‘issues with spare parts in the stores’. It did not take us long to conclude that the source of the problem was to be found elsewhere. We received permission to extend our remit. We spoke with staff in the sales office. Typically, when a customer phoned to order a pump, the member of staff taking the call should ask him how soon he required it. This, however, was not the practice. Instead the sales order clerk would respond by asking him ‘Will 30 days be OK?’ This junior member of staff was inadvertently giving the organisation less time to fulfil the order than was necessary, thereby creating pressures at all stages along the process chain. (What happened at Limitex was not a unique event. I have come across similar misguided handling of sales enquiries elsewhere.)

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A Sprat to Catch a Mackerel Typically Sam, a salesman, will tell the manufacturing department that a customer is requesting a product that is similar to one displayed in the product catalogue (a standard product) but he would need it to be modified to suit his particular requirements (a request that figured so prominently at the meeting of Bill, the chief executive with his managers, reported at the beginning of this chapter). The salesman may argue that just this once the client be indulged. This will mean making the modification required to produce a ‘special’, but that the customer be charged the price fixed for the standard product .This, Sam will claim, is ‘a sprat to catch a mackerel’. The customer has dropped a heavy hint that there is a prospect of a big order. On the face of it this may sound plausible but it conceals a very real risk. The customer may come back and ask for more, assuming he will continue to pay the standard price. This will mean that the profit margin on that item will diminish or, worse still, disappear. This time manufacture, having survived the hassle associated with making an item for the first time, may not object so loudly. So the customer continues to get the same favourable treatment. This is not an uncommon event: but it may not be the end of the story. This unprofitable response to a customer’s request may be seen as setting a precedent. The first mackerel (a product for which the customer pays a premium) has not yet been caught but other sprats are being made available – all with an inadequate profit margin. It is a slippery descent. So the moral of the story is yes, the company must be ready to respond to the market but to do so in a way that is in alignment with the corporate goal of profit. Now in such decisions the finance department may argue they should have been involved, and they have a strong case. The reason that Sam ‘forgot’ to inform them was because he anticipated a delay which would have lost him the order. But when he had a real prospect of the bigger order Sam should of course have put finance in the picture to enable them to fix a realistic price. As the case of Bill Scott’s company makes plain, it is essential that wherever a request for a special version of a standard product is received, the business chief should be in the picture from the start. If there is a risk of delay from any quarter they alone have the authority to make sure this does not happen.

How to Measure Innovation Introduction Innovation is one aspect of the wider concept of improvement – a distinction that is often blurred. Apart from the fact that innovation has a special appeal in a world that is imbued with the marvels of apparent applied science with technological ‘breakthroughs’ and ‘groundbreaking’ feats, it has acquired a cachet of its own that is different from the wider idea. It does, however, have its downside, not least in terms of local measurement, as this chapter seeks to make clear.

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Measuring Success and Failure It is easy to measure failure: there has been no shortage of examples. It is a commonplace that countless companies in the UK have sunk without trace either because they have failed to innovate, as in the case of the British motorcycle industry, or because they have done it badly, as with the indigenous motor car makers. Unlike Ford, its principal rival on home territory, what in its last days came to be known as British Leyland (or BL) produced a single successful model – the Mini – over a period of 25 years. Measuring the results of failure on this scale has presented few problems. As will be seen, the prospects for measuring success are sometimes less clear-cut. Successful innovation requires the following:

• a strategy that includes a clear view of the innovation process; • the ability to organise the innovators and others who support the innovation process.

A Strategy Deciding what Product or Service to Develop Any novice new to a top job who looks to marketing theory for guidance will come away empty handed. Take the most fundamental question of all – should you make a single product or many? The current fashion (and it is no more than that) is for focus, which means a single product or service. Yet in terms of profitibality, the winner is General Electric of the USA, which under Jack Welch was the most admired company of all. General Electric produces a vast range of products ranging from aero engines to medical magnetic resonance imaging scanners. Amongst observers and commentators there is no consensus as to why GE has proved so outstandingly successful.

A Clear View of the Innovative Process Amongst those who employ the language of hyperbole, ‘breakthrough’ is a favoured expression. It has implications for the measurement of performance, but in fact any occurrence that merits this title is a rare event. Yet American business schools have been apt to see things differently. According to business school doctrine, all that needs to be done is study the experience of some shining exemplars such as Timex. At American business schools a whole generation of would-be executives learning the art and mystery of management were introduced to the story of Timex, presented as a classic case of a corporate breakthrough engineered by clever people. It went like this. Timex emerged from the Second World War as a mass producer of fuses and mechanisms for bombs and projectiles. At the end of the war government contracts dried up. Those in charge of the company had given little thought to the future of the business. So they put their heads together. Seizing on its ability to produce semi-accurate timing devices, they repackaged them as wristwatches. By so doing Timex revolutionised the world watch industry. What really happened was rather different. For Timex’s top managers the conclusion of the war spelled the end of an era in which money was easily made. They now had

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no product to offer to a post-war world, and because they had been dependent on government contracts they had no experience of selling anything. There was much head scratching. Eventually a couple of workmen suggested riveting together timing devices to produce a timepiece. With no better idea forthcoming, it was decided to give it a try. A handful of salesmen were recruited and set out to peddle the new product through the traditional channels. This proved to be a mistake. For jewellers repairing watches was a steady source of income, and they failed to see the attractions of selling a cheap watch to be used for a while and then thrown away. To those in charge of the company it seemed that the game was up. As a last throw of the dice the decision was made to try selling the devices to drug stores. Some of these saw the possible advantage of selling the watches as novelty items and slowly the idea caught on – but it was several years before this innovation could be claimed a success. The reality is that the process by which Timex got there was one of trial and error. There never was anything that could be said to be an overnight success. In terms of measurement the significance of events at Timex is this: the revenue that eventually flowed in was massive. Had the success been immediate, the costs would have been minimal: that was part of the attraction of this piece of fiction. The facts pointed to a different conclusion: that the costs of the long drawn out process were substantial and came close to sinking the business before it was rescued just in time to permit a happy ending. The raw business students who swallowed this story must soon have come to learn that developing a new product has few of the attributes of a fairy story. The reality is that technical breakthroughs are rare and the costs of developing a new product are high. A more realistic picture of the innovation process is captured by past events at Toshiba. Amongst Toshiba’s numerous factories there is one regarded by insiders as something of a Cinderella, largely because of its remoteness at the most southerly tip of Japan’s southernmost island, Kyushu. For Toshiba’s engineers, a posting to the plant in Oita was regarded as an assignment to Japan’s equivalent of Siberia, yet this plant produced the first one-million megabyte microchip, thereby outstripping its Japanese competitors. How did they do it? Yasuakli Mioura, senior engineer, explained how they approached one of the many improvements made. As a part of the process, the electronic circuits were printed on to a silicon wafer in a series of operations. At first this proved difficult to do: eventually accuracy was improved by involving the maker of a piece of kit called a wafer stepper which made images of the circuit design on the silicon surface of the chip, one at a time. ‘Working with us,’ said Miura ‘they modified the equipment.’ That was just one of many improvements made. ‘We did not give ourselves a grand target. Our success was based on many minor improvements, not by anything that could be called a breakthrough.’ Japanese business chiefs are not given to indulging in fantasies of low-cost innovation. They have always been keenly aware that these costs will always be high and are a price that has to be paid.

The Cost of Hard Graft Behind the glamorous image of innovation is hard graft on a vast scale, and hard graft is a source of cost.

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One of the spectacular achievements of British innovators has been the Harrier military aircraft (the so-called ‘jump jet’). The purchase of substantial numbers of a modified version by the US navy is evidence of its commercial success. However, it took the best part of two decades of hard slog to get it into the skies. The reality of this aspect of innovation was brought home to me when watching my colleagues struggling to achieve vertical take-off with a piece of ironmongery they called a flying bedstead. Such were the humble origins of a rare technical success. However, this could never have been achieved without the availability of public funds, and it is evident that there is no such safety net for most commercial concerns. Take the pharmaceutical industry. All the big companies in this sector make sure that they always have a number of projects in the pipeline but the ratio of successful to unsuccessful programmes can be as low as one in ten. (This of course is an argument that is often used in defence of prices considered to be high.) But the prizes can be dazzling. The most common aspiration within the industry is to emulate the success of what was once a modest British business called Glaxo, which developed a blockbuster drug called Zantac that propelled it to the position of a leading world player now known as GSK (GlaxoSmithKline).

Organising the Innovators There was one lesson to be gleaned from the Timex case – the true version, that is – that was missed by its promoters. The development of the new product was in the hands of ordinary staff, not those of a professional elite. It was none the less effective. The only downside was that because they were not doing something they were hired to do, it would have been well nigh impossible to calculate the cost. What happened at Timex was unusual. The norm is for innovation to be regarded as an activity that requires technical expertise. Even in quite small firms it is work that is assigned to a separate department or to a designated individual. Measuring their achievement is not always clear-cut. At one time it was part of my job to recruit staff for a research and development laboratory. In charge was a kindly but ineffectual manager. Staff were left free to pursue pet projects and the level of job satisfaction was high, but there was no system to measure the results of their work. However, after a few years there was an abrupt change following the appointment of a new chief executive. He began to ask questions about the contribution of the laboratory to the business. There was nothing to show either in terms of new products or significant improvements in existing ones. A new research and development (R&D) manager was appointed, and a programme of future development work was announced. In an attempt to assuage the sore feelings of the boffins, work they were given to do was retitled ‘applied research’. Of course nobody was fooled. For the first time staff were engaged on work that would contribute and hopefully secure the future of the company. Within a year there was a trickle of substantial improvements in existing products. In many corporations control over the work of research and development staff and the measurement of results that can be attributed to them remains an issue. The laboratory to which I provided a service was small: the number was no more than 70. Large pharmaceutical firms employ many hundreds.

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It is worth noting that one of these – Astra Zeneca – has farmed out a small part of their R&D work to a small biotech company in order to increase its capacity to measure the results of the work of those who are innovating on the company’s behalf.

The Path to the Marketplace Success in applying new ideas rarely depends on the R&D function alone. The transformation of what the laboratory has produced into something that can be made in sufficient volume and which has appeal in the marketplace is snared by potential pitfalls. The uninspiring record of corporate innovation in the UK is well known. The most disastrous failure was that of a company called EMI which invented the first magnetic resonance imaging (MRI) scanner. The company failed to move it from the laboratory to the market – it was left to other businesses to commercially exploit the ideas of the innovator. The outcome was that they incurred the costs of development but failed to reap a financial return. The market for MRI scanners today is worth many millions. What EMI lacked was marketing muscle. This is what is required to negotiate the tortuous path from laboratory to market.

Bending the Organisation As the clever boffins with whom I worked were to learn, the purpose of innovation is to make money. If your technical effort is not making money, changes need to be made, and these may have to be radical. Research conducted at 25 factories which were developing new electronic products (Burns and Stalker 1994) showed clearly that for the transfer process to work it was necessary to suspend the chain of command. Protocol was brushed aside. Where this was done, innovation made money. Where this did not happen, projects achieved limited success at best.

The Measurement of Innovation Where a new product proves successful it is of course a triumph for the innovator, but there are always others that seek a place in the sun. In the case of the Harrier it was manufacture. In that of any successful drug, marketing will justly contend that their muscle made a major contribution. Both marketing and manufacture can point to the cost they have incurred in supporting the innovators. These costs can usually be measured to a degree, but measuring the individual contribution of any of the three functions would be much harder to determine. In other words, success can only be measured in terms of the corporation as a whole. And this, it can be argued, is all that matters.

How to Measure Improvement Innovation is the more glamorous side of the wider concept of improvement. However, there are two big differences between innovation and improvement. First, improvement is more easily measured. Secondly, while innovation has to be left to the professionals, when it comes to the wider notion of improvement the best results will be gained where

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the invitation to produce ideas is most widely spread. Improvement is like common land: it belongs to everybody. It is – or should be – a great leveller. But being levelled does not appeal to everybody. Their stance can be summed up as ‘everybody can produce ideas but there are some who are better at it than others’. It is important to take a closer look at the vested interests which, if left unchecked, will suppress the ideas of others. A number of occupational groups share a common belief in their superiority, as the better educated often assume that they have a natural advantage in ‘thinking up’ ideas. Both assumptions have no foundation in fact. A third source consists of groups who are the source of ideas. As remarked earlier, in surveying the properties of the command structure, position in the pecking order is one powerful source. There is another: those who consider that finding ideas for improvement is an integral part of their job.

Icing on the Cake Just how pervasive such prejudices are emerged in a discussion with a group of engineering tradesmen whose primary function was to maintain machines. The factory chief decided to set up a team of workpeople and to invite them to produce ideas for improvement. The team was to be a mix of machine operators and engineering tradesmen. This proposal was discussed with the tradesmen as a group. Several expressed the view that suggesting and making improvements was an integral part of their work. When asked whether they saw scope for the machine operators to suggest ideas, Des, a voluble self-appointed spokesman for the group, talked around the subject for a while before eventually conceding: ‘I suppose they [his worker colleagues] may come up with the odd idea but this would just be the icing on the cake.’ The implication was clear: the allimportant task of baking the cake must be left to the experts. In recent times the profile of the idea of improvement has been raised sharply by the widespread interest in Japanese business practices, particularly kaizen, which is translated as continuous improvement. Many firms have introduced programmes inspired by this idea, but efforts to calculate the value of ideas suggested has been rare. It is a purpose of the next section to show how this can be done.

Improvement in Context If improvement is to be measured it is essential to first put it into context. In any organisation there are forces at work which help it to progress. When they have the scope to do so, Tom, Dick and Harriet will try to do whatever they can, however modest, to improve efficiency. This will be done quietly, unaccompanied by fanfares. However, the results of this will go unmeasured. What is often overlooked by the champions of kaizen is the fact that in every organisation there are usually some who for reasons of their own are unwilling to support such efforts or may seek to undermine them (Jenkins 1996). The results of these tactics can often be measured, as Eddie at Akwa was able to do, and this needs to be done because it makes no sense to invest money in improvement programmes if others are left unchecked to move the organisation in the reverse direction.

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Getting Ideas you can Measure If your intention is to elicit the ideas of people in your charge, there are two options available and they are diametrically opposed. These are suggestion schemes and people working in groups. At the root of the notion of the suggestion scheme lies the conviction that people will respond more readily, acting as individuals. Safeguards are built into these arrangements to recognise the property rights of an idea’s owner in order to protect them against the risks of misappropriation. The other foundation on which the assumption rests is that individuals need a financial carrot to persuade them to disclose their ideas. The alternative option is to elicit ideas by encouraging people to work together in groups. The underlying principle is that more will be achieved by enabling people to share and exchange ideas than by their acting alone.

Suggestion Schemes The first recorded suggestion scheme was at Alfred Krupp, the giant German steel maker, where it was introduced in 1867. It was prefaced by this injunction: ‘If you have any ideas for improvements or inventions or any doubts about the usefulness of established methods, these should be brought to the notice of your immediate superior who will then report them to Management for checking.’ An advantage of such schemes has been the ease with which the results of ideas can be measured. There have been some documented successes. In recent years a BA Concorde pilot applied new techniques to what are known as precision circuits (part of the cockpit panel) to improve arrival time performance. His idea was estimated to have saved 1 million kilos of fuel per year. (He was awarded £5000.) With most firms that use this method for eliciting ideas, the starting point is an invitation to slide a suggestion through an aperture in a box designated for this purpose. The arrangements that are made to enable the scheme to work have proved cumbrous. For the employer a major attraction of such schemes is that in keeping with the command model they can invite ideas while keeping the scheme within tightly defined limits.

Through The eye of the Needle There are usually restrictions on what ideas will be considered. If you come up with a wheeze for a better way to do the job you are employed to, this is often ruled to be not eligible for consideration. You are not to be rewarded for what should be an integral part of your job (and might make your job easier to do). If the idea relates to a machine that is in your charge, don’t come up with a bright idea to improve its efficiency. This, you are likely to be told, is the task of those whose function is to service and repair it. It is their duty to propose the idea, and so should this have eluded them, the idea is unlikely to see the light of day. There is a further limitation. You may come up with an idea that has been suggested in the past but was turned down at that time. This will not be considered, regardless of the possibility that things may have changed in the meantime with the result that there is now scope for its application. These are the hoops through which a nascent idea must jump. The ideas that pass for consideration are those which have survived this initial screening.

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Filtering Ideas You are told that because it is essential that workpeople believe that the system is fair, you are advised to set up a committee representing the different departments considered to have a stake in improving the efficiency of the unit. Its function is to assess the potential contribution that suggested ideas – those that have been weeded out – can make. In practice, putting a committee at the centre of the process proves to be a recipe for bureaucratic delay. The committee is usually advised to adopt a formula for working out what cost savings can be made and what financial reward should be made. The formulae that are used are rarely noted for their simplicity. Try working out this one, employed by a company that makes engines for trucks: labour savings are estimated on the basis of the time studied, time saved, on each piece, multiplied by the estimated scheduled production or useage of the piece for 12 months, multiplied by the average hourly base rate for the operation, minus 25 per cent of any adoption costs. This, it is worth noting, is one of the simpler formulae used by firms using suggestion schemes. As part of the process of evaluating suggested ideas, any manager with a potential stake or interest in the suggestion must be consulted. Typically an official is nominated to evaluate ideas that have been submitted at an early stage and prepare a report which is put before a sub-committee. It includes estimated benefits, usually in the form of reduced costs. If this body approves the contents of the report, the ideas that have been selected are passed to the main committee which usually meets once a month. It is their task to ensure that all the necessary calculations are made to estimate anticipated savings. It is perhaps not surprising that the whole process from start to finish (commonly known as turnround time) is rarely completed in less than 100 working days. Small wonder, then, that research suggests that few companies regard their suggestion schemes as having been a success. Of course its champions will argue that the results can be measured and with precision – but because the scheme is an obstacle course and the process takes so long there is unlikely to be much to measure.

Putting a Price on Ideas Groups as a Source of Measurable Ideas As with ideas funnelled through suggestion schemes, those presented by people working together in groups lend themselves to measurement: so long as, that is, they are put into practice and the results are there. The road to the stage at which you can measure a result is snagged by potential pitfalls. To avoid these there are a few simple rules that must be religiously observed.

Deciding Where to Start If you are looking for quick and measurable results your managers are unlikely to prove the best level at which to start.

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Dairex is a factory making dairy products. As part of a campaign to reduce costs launched by its head office in the Irish Republic, managers at the plant were ordered to come up with some ideas. One afternoon they got together in the tea room. At the end of three hours they emerged with two ideas: these were to take more care to switch off lights; and to replace the daily supply of fresh flowers to the reception area by a single artificial substitute. There are a number of reasons which will explain this limited output, one of which is obvious. Because, as has been noted, the command model boxes the manager in, it explains their limited capacity to generate ideas or – to employ a current overworked cliché – to think outside the box. The unproductive experience at Dairex suggests that there are better places to start than with managers. As a general rule, the lower down the organisation you go the greater the natural capacity to express ideas.

How to Get Started People form into groups and are invited to suggest ideas for improvement. For this to happen members of each group have to leave their place of work for the occasion. This puts a premium on making the most productive use of the time made available. To make best use of the time there are basic rules that must be applied:

• The agenda. A group must have the right to suggest an agenda or to amend an agenda presented to them by those in charge.

• Recording ideas. Ideas must be recorded by a member of the group. • Ideas into practice. It is essential to provide whatever resources are required to apply ideas within a defined period of time.

• Feedback. The group must regularly receive data that enables members to measure results achieved.

How to Measure the Output and Value of Ideas As noted, the total ideas output of the managers at Dairex was two. So long as these basic rules are applied the results will be better. These are the measures you should apply:

• • • •

by the total number of ideas produced by the number of ideas that remain after weeding out the impractical by the number of ideas put into practice within a defined period of time by the value of the results of the ideas applied in terms of money. Typical outputs of groups consisting of workpeople are as follows: Total number of ideas

80

Number of ideas remaining after weeding

20

Number of ideas applied

6

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Putting a Price on Ideas The final stage is to establish the value of ideas that have been applied. This is how a group can learn to put a price on ideas. In this instance the team consists of workpeople in a factory setting assisted by a consultant who is acting as a coach. The discussion starts with a group member suggesting the purchase of a piece of equipment. Coach: ‘What will the benefits be?’ Group: ‘It would make the job easier and it would mean we could get it done more quickly.’ ‘OK,’ responds the coach, ‘how much will this equipment cost?’ Silence follows. Eventually someone says ‘We don’t know.’ Coach: ‘Right. Let’s find out.’ [Somebody must be available to get the figures.] The information appears. The kit will cost £3000. So the first fact has been established: the group is proposing to spend £3000 on a machine to increase efficiency. The coach will then pose the question: ‘What will be the benefits of using this equipment?’ Group: ‘It will produce more throughput.’ Coach: ‘How much?’ Group member produces his calculator: ‘500 units per shift.’ Coach: ‘How many shifts are there a week?’ Group: ‘Eight.’ The calculator man shouts that it means a total of 4000 additional units a week. (There is astonishment all round.) Coach: ‘What is the value of a unit?’ The team will not know at this stage. Again, there must be somebody to find out. Each unit is worth 15p. The calculator man: ‘That makes it £175 a shift and 8 × 175 = 1400 a week: that’s about £70,000 a year. Blimey!’ Coach: ‘So how long is it going to take to recover the cost of the equipment?’ Calculator man again: ‘About four months.’

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Conclusion As noted earlier, there are two options available for eliciting ideas and for measuring their value. The differences between a suggestion scheme and people working together in groups are:

• In groups ideas are shared whereas in suggestion schemes the emphasis is on individual ownership of an idea which needs to be protected.

• Suggestion schemes place tight restrictions on what ideas will be eligible for consideration. Group discussions are subject to no such constraints.

• Suggestion schemes offer financial rewards. With groups working to produce ideas these have no place. • The results of ideas produced by both options are measurable: but the output of ideas from groups will exceed those of a suggestion scheme.

How to Measure Results and Motivation The reasons for the remarkable achievement of the team of workpeople at Topbread were examined earlier in this book. The availability of the data they needed to measure their performance was key and their achievement gave rise to the question why can their achievement not be reproduced at corporate level? The plain answer is that it can – but not with the unreformed organisation model that is at the centre of SAD. The purpose of this section is to outline the criteria an organisation must match to achieve this more ambitious goal and to examine its implications.

The Criteria to Apply These are the criteria an organisation must match. It must:

• set targets in such a way that people are committed to achieving them; • regularly supply data that will enable them to measure their performance; • where data reveals underperformance, it must make available the resources needed to take prompt corrective action. As has been made clear, the command model falls short of matching these requirements. The only model that will accomplish these is one that is designed to support the process chain on which the achievement of the central goal depends. These are the advantages it offers:

• What needs to be done at any one time does not depend on a decision from above: it is evident to those who are closest to what needs to be done;

• It normally provides ready access to performance data at each stage in the process (as opposed to data remaining locked up in administrative departments); • If something goes wrong it is usually evident what needs to be done to correct it. All that those in charge have to do is to remove any impediments to remedial action.

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The Contribution Test This has implications for everyone who is part of an organisation. The only positions that must be there are those needed to support the process chain and to measure its performance. There are a limited number of fixed points in the organisation. First there has to be somebody at the top to take charge. At the other end there also have to be the people who execute the basic tasks which keep the organisation afloat. In the manufacturing context it typically includes people who invent, make and sell things. These tasks are interlocked by the process flow. While there can be no argument about either the need for positions at the apex those at the bottom, the same certitude does not apply to any intermediate positions. These are all open to the question: why is it there, what contribution does it make and how is this contribution measured? Once again it is manufacture in which this is most clearly visible. Somebody has to feed in materials to be processed and somebody has to be there to repair machines. Their contribution is evident and can be measured. However, in any organisation there will be other positions which are less amenable to measurement. So long as this lack of clarity prevails it is hard to judge whether any contribution is being made. Questions need to be asked.

Making it Clear what People are There to do If you want motivated people to make use of their talents, they need to know what it is that they are doing that is being measured. As noted earlier, any discrepancy – real or suspected – between what they are told and what they experience will envelope measures in an impenetrable fog. This was the case at the Ford Motor Company where the official company line conformed to the command structure (waffle, according to some of the supervisors). This was in sharp contrast to their conviction that in practice they were measured by the extent to which they were seen to support the process (in the physical shape of the moving belt).

The Case of the Disappearing Supervisor Before I knew better I was an unwitting contributor to this ambiguity. At an early stage in an undistinguished career in industry, I was given the task of assisting 100 supervisors to sharpen their leadership skills in a factory that assembled aircraft. At this stage I was very green and had swallowed the idea that mine was a job worth doing. All managers complied by sending their supervisors to take part in this exercise – with the exception of Gerry Loder. Now Gerry was highly regarded. He was the only manager who got machines built on time. Even George, the tyrant who ran the factory, did not tangle with Gerry. Other managers worked from offices in ‘mahogany avenue’, in a building at some distance from where aircraft were assembled. I went to see Gerry in his lair, which was close to where the work was being done. He got up and closed the door to reduce the din of rivet guns being applied to pieces of fuselage outside.

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In response to my question Gerry replied: ‘The reason why I am not sending my supervisors to your training courses, Dave, is this. You are trying to train them to be better supervisors. Well, I don’t want my guys standing around “supervising”. Their job is to hunt for any parts that are missing and which risk holding up the assembly of my aircraft. My guys know what I want them to do and that I judge their performance on how well they do this.’ Although what he had to say was bad news for me at the time, I owe a debt to Gerry. He helped me to understand for the first time what makes an organisation tick. It was my introduction to the power of the process. Amidst the army of writers who have expounded their ideas about organisation, Wilfred Brown is one of a tiny number who have actually run one. Brown was managing director of a company called Glacier Metal, which made ball bearings. He was in charge of two factories. This is how in his book, An Exploration of Management (1955), he described a supervisor’s tasks at one of them. He explained that because a machinist could not leave his work station without loss of production, the primary task of his supervisor was to ensure that each workman was supplied with sufficient material to enable him to continue working without interruption. In practice this often meant that a supervisor had to load it on to a trolley and wheel it within easy reach of the workman. This, declared Brown, was what supervisors were there to do. Brown, in other words, saw the primary role of a supervisor as facilitating the process workflow – so the supervisor at Glacier was measured by his performance in supplying a workman with the materials.

The Needed to Produce The lesson to be drawn from these two very different cases is that it is essential to know what people are there to do and that this is often obscured by a smokescreen, the source of which is an organisation model that is not suited to performance measurement. One of the clearest representations of this perspective has been that of Tony Hayward as Chief Executive of BP in an address at the Stanford Business School in 2009. In explaining how the company lost its way under his predecessor Lord Browne (best known within the company as the ‘Sun King’): ‘At BP we make our money by someone, somewhere, putting on boots, overalls, hard hat, glasses and going and turning valves: somehow we had lost track of that.’ As we have seen, a shortcoming that both the command model and accounting doctrine share is the result of their common prescriptive approach: namely their insistence on measuring performance in terms of what they declare should be done in place of the reality of what they actually do.

Conclusion The organisation you need must match the following criteria: 1. The shape of the organisation will be whatever is judged to be best for supporting the

process chain. 2. The vertical element will be kept to the irreducible minimum.

114 M e a s u r i n g P e r f o r m a n c e 3. The performance that counts at all levels except that at the apex of the organisation

will be measured by the contribution it makes to achieving the central goal by supporting the process flow. 4. All measures will be designed to register achievement and shortfalls in containing disruption to the process flow. 5. Everybody at all levels must know what it is that they are doing that is being measured. 6. Those best positioned and with the skills required must be enabled to take prompt corrective action whenever is needed. This is what it takes to reproduce on a corporate scale the achievement of the Topbread team. Business chiefs are unlikely to underestimate the scale of the task that has to be done to reach this destination. The only decision required is whether the attractions of the prize make the effort worthwhile.

How to Get Motivation and Measure it The spectacle of senior managers dancing on a boardroom table, punching the air and chanting ‘we shall overcome’ is not something you might expect to witness on a visit to a blue-chip company. Believe it or not, these bizarre gyrations were part of a campaign to motivate managers and to which a number of well-known corporations have subscribed. This recipe for stirring managers into action owes its origin and inspiration to the USA, where evangelists have broadcast the virtues of putting ‘the wow’ into management. This flourishing sector of the motivation business is the property of the hallelujah brigade – a mix of preachers and charlatans who arrange events that are a cross between a boy scout jamboree and a religious revivalist prayer meeting. Each member of this motley congregation claims to have the single key that will unlock the door to the art and mystery of motivation. The lineage of this prescription is not hard to trace: its roots lie in the earlier popular programmes for transforming supervisors into leaders. Despite the success of salesmen in attracting clients (and generating revenue), all these programmes give rise to the same question to which as yet no answer has been found. How do you measure the results? It is ironic that business chiefs, who like to polish their credentials as tight-lipped operators with an iron grip on the corporate purse strings, have lavished huge sums of money on such projects that have no measurable outcome. As reported earlier, before the emergence of leadership as the apparent prime mover in motivation, the doctrine had long prevailed that imposed targets alone could achieve this result. This had two potential advantages. The champions of accounting doctrine never sought to make it a mystery to which they had the single key: they made it plain for all to behold. The formula was: targets = motivation = performance. Secondly, that which the leadership principle lacked – the results – could be measured, or so it was claimed. The flaw in this prescription was that the value of this piece of doctrine has always been open to question. There is an abundance of evidence to show that imposed targets, far from motivating to attain higher performance, divert effort into putting an unwarranted gloss on the figures that are presented. Moreover, the potential of imposed targets was based on a controversial, unscientific theory of human behaviour.

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Co-existing Formulae Although the leadership idea has challenged established doctrine, it has never succeeded in supplanting it. The two concepts have continued to co-exist for half a century. When the economy is buoyant enough to leave those in charge with sufficient loose change at their disposal, they send managers in large numbers to attend training courses designed to turn them into leaders. On the other hand, it is common practice to employ schemes that provide incentives to achieve imposed targets. For all except those at the top these often go by the name of ‘performance management’. At board level, by contrast, they are often accorded more august titles. But they all add up to the same thing. They all enshrine the principle that people need imposed targets to perform. The consequence of this assumption, of course, is that nobody at certain levels will put in the effort necessary to achieve the corporate goal unless they have a juicy, dangling carrot to pursue.

Motivation you can Measure Although both the imposition of targets and developing leaders are poles apart, as prescriptions for motivating people they both rest on a common foundation, which is an assumption that is controversial and unsupported by any scientific evidence: that the behaviour of people at work is inherently passive. This passivity is not caused by any influence or intervention – it is just that this is how people are. This is the reason why some stimulus needs to be administered, be it a dangling carrot or by an all-singing, alldancing supervisor. Now there are others who will see this as a caricature. They will not recognise this picture of people acting like zombies. More compelling is the pile of evidence that challenges this view of the behaviour of people at work. They will argue that if people are seen to behave like zombies, there are reasons that will tell you why. Take the case of Tom, the workman who had eventually given up asking for assistance to repair his machine, or Will, the laboratory manager who changed technical recipes only to be carpeted by his manager. Such examples suggest that if people’s behaviour is – or appears to be – passive, it is because they have tired of banging their heads on brick walls. They have made strenuous efforts to do what they see needs to be done in the interests of the organisation but they have found themselves hemmed in by constraints. This presents a very different version of why people behave as they do. They are not inherently passive. They are apathetic, having eventually thrown in the towel after an unsuccessful struggle to do their job properly. For many business or unit chiefs this could prove to be good news: few of them are not plagued by the condition commonly known as inertia, an issue that has already been visited in these pages. Now a prominent feature of inertia is the passivity – real or apparent – of people. If those in charge go along with the assumption that people at work are naturally apathetic as a truth beyond challenge then you cannot escape the conclusion that apathy is a problem to which there is no solution. By contrast, if they are persuaded that passive behaviour is the product of constraints imposed by the way their work is organised, the picture is transformed. The objective of motivating people is achieved first by identifying these constraints and then removing them.

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This reform will ensure that people have access to the information they need that will show them what needs to be done to free them to act and provide them with the data needed to measure their performance. This is one sure way to accomplish the aim that has eluded so many – that of motivating people. The command structure that is central to the efficiency model adjures managers to impose targets in order to motivate the workforce. The process chain which is the hub of the productibility model tells you that the command structure is the source of the constraints that prevent people from doing what needs to be done. Remove them and you have motivation, and it is an outcome that can be measured – business chiefs would be unlikely to part with substantial sums of money in search of the magic key. It has been the purpose of this chapter to set out an alternative approach. An advantage is that the results can be measured with precision. But it comes at a price. As has been already argued, to get this prize fundamental changes need to be made in the way work is organised. In judging just how important the power to motivate is to those in charge, this is the acid test:

• Are they enabled to take corrective action or have direct access to resources that have the skills required?

• Are they regularly provided with the data they need to measure their performance? A final imperative is for those in charge to measure the results of the higher levels of motivation that are the outcome of these reforms. The results of these improvements should serve to encourage those in charge to prepare a wider agenda for reform. This is the subject of the chapter that follows.

chapter

8 The Measurement Toolkit

How to Test your Information System As most people who work in large companies will be aware, there are systems driven by powerful computers that process huge amounts of data. So it seems reasonable to assume that they have the capability to provide all the information needed for the exercise of effective control.

Data Deserts You could be mistaken. The realisation of the scale of potential shortcomings of such systems I owe to Keith, a production manager at one of Kodak’s large plants, then located in north London. There the workpeople in a department producing huge rolls of film had been formed into a team to run the day-to-day planning and control of the operation. Keith was in charge. I was engaged on an assignment in the plant engineering function which took me into Keith’s department. He told me that his biggest problem was lack of the data needed for day-to-day control. He said: ‘At this place we have state of the art information technology of every kind. You name it, we have got it. But when we set up the team earlier this year there was not a single piece of data that we needed to run this operation.’ He went on to explain that it had been his main task to fill what he called the ‘data void’. It had been uphill all the way. Since that time, working in a number of organisations, helping them to improve the availability of the data needed to secure effective control at the workface, it became apparent that Keith’s data void was not a rare exception. Apply just one of the four requirements from the Topbread formula – regular access to the data needed to measure performance at local level – and you are likely to find that it is not there. So much for the computer system in terms of its capacity to distribute data to the people who need it in a form they can use. It is time to turn attention to those who have to feed in the ‘raw’ data. In many undertakings this happens at two levels: that of the people who execute the basic tasks and those who hold more exalted positions.

At the Workface In many manufacturing concerns the source of basic information required for control is those who toil at the grass roots. The result of a number of surveys conducted by the partnership of which I am a member present a coherent picture. In total well over 100 workpeople and 25 supervisors have taken part.

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An average of less than 20 per cent of workpeople showed an understanding of the purpose for which the data was needed. As a result, they did not consider that getting the data accurate was important. Less than 10 per cent had any knowledge of how the data collected by them was later used An observation which represented a common view was ‘We just hand it in at the supervisors’ office.’ And asked how they thought it was used, most replied that they did not know. An alternative typical response was: ‘The supervisor works on the figures to make them look good.’

Amongst Managers You might think that any system designed to collect data would work in such a way as to encourage managers to supply accurate data. The way things were done at Motco (see Chapter 1) suggests that this is not always the case. There are sometimes other shortcomings.

Martin in the Dock The way the system for reporting results works sometimes makes managers feel they are on trial. Putting managers in the dock works against the corporate interest because the pressure can be such as to give managers an incentive to report better results than the facts can support. Take the case of Aeroflex, a firm supplying components to the makers of aircraft engines and the subsidiary of a large engineering company. Manufacture at Aeroflex is a complex process of assembling parts. The suppliers of some of these are scattered around the globe. The logistics of getting all the pieces together at the right time are exacting and the average time required for completing the assembly of a product is six months. Now in all the other subsidiaries of the parent company the average time required for completion is eight weeks. The managers of each subsidiary feed data into the reporting system once a month. Each month the managers of all the units except Aeroflex are able to report a number of finished goods, a performance in terms of time that the central finance department deems to be ‘respectable’. This, Martin, the manager of Aeroflex, is unable to do. Because on average he is able to report one completed product every four months this meant that for each of the intervening three months he had to submit a nil return, so he is forever in the dock. It is the finance department that operates the reporting system. Their knowledge of the business of Aeroflex is limited. They are uninterested in the reasons why it has taken longer to complete a product there than at other units. To submit nil returns is seen as an unpardonable sin. Martin has long given up trying to explain the reasons why to the unsympathetic, humourless ‘number-crunching robots’ (Martin’s words) at head office. Although Martin is given a harder time than those in charge of the other units there is no love lost between any of them and the central finance department. The private aim shared amongst them all is to ‘get one up on the Gestapo’. Now it is obvious that this barely concealed animosity between the unit managers and central finance does nothing

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to further the cause of securing the regular supply of reliable information. And for this the way the system was run has to take some of the blame. Their regime insists that their rules must be applied uniformly across an organisation, regardless of the disparate and distinctive features of different units. Such rigidity tends to erect a barrier between the finance department and the managers on whom they are dependent for the regular supply of information. It is a situation that Harry would be quick to recognise with his colourful interpretation of the concept of overheads (see Chapter 5). The potential consequences of such conflict are evident. The accurate reporting of data is required not just by finance, but by those on the corporate bridge to steer the ship. If the system itself is deeply flawed they will be steering with navigational aids that at best are on the blink.

Assessing the System The systems on which corporations rely for the collection and distribution of data often offer scope for improvement. Those in charge may consider it worthwhile to conduct an assessment of how well their system is working. This will best be done by a survey (conducted through sample interviews rather than by questionnaire) that should include people who work at all levels. In the interests of securing objectivity, it is obvious that this will best be done by an external agency. The following are some of the issues that may be worth addressing: 1. Data availability −− Identify the key positions in which data is needed to exercise control at corporate level. −− Specify the data required by the individuals in these key positions in order to be able to exercise control. −− How effective is the present system in making this data available? −− How satisfactory is the process by which ‘raw’ data is converted into information for distribution to those whose task is to exercise local control? −− To what extent does data made available assist in effecting improvement? −− Out of the total number of people employed, what proportion regularly receive the data they need to measure their performance? −− Out of the total number of people employed what proportion regularly receive the data they need to take swift corrective action where it is required? 2. Data collection −− How far do people who are the source of this data understand the reasons why it is required and the need for it to be accurate? −− How far do they understand the way the system operates that handles the data they feed into it? −− Are they confident that the correct use will be made of the information they collect and submit? −− On a scale from 1 to 10 how do people rate the reliability of data that they make available?

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−− To what extent do managers feel that the reporting system that requires them to enter data regularly enables those in charge to make a fair assessment of their performance? −− To what extent is it necessary to convince people that data provided by them will not be used to their personal detriment?

Measurement Systems: the Options The Nuts and Bolts Units of measurement The principal units are:

• Numbers • Percentages • Money terms. Numbers Examples of measuring by numbers are quantity of items produced, sold, or the number of transactions completed. In manufacture, of course, it was numbers which underpinned the long-established practice of payment by results, which was once common but which has now migrated elsewhere – to board level in the private sector and to many parts of the public service segment. Numbers may take the form of hours worked, which is central to SAD in pursuit of the aim of maximum utilisation of resources. It will normally be employed to count the number used against the figure that has been estimated (what SAD calls spend, volume or usage variance). In reporting the numbers, the term ‘unit’ itself is favoured by the motor industry, where ‘units’ stands for vehicles produced. Every business that makes or handles products uses the most appropriate terms that may reflect their physical characteristics such as tons, litres or metres: or by whatever they are stored in: casks, boxes cartons, cases and so on. The main advantage of using numbers is that it makes for transparency: you either make them or you don’t. Underperformance is hard to conceal.

A factory model A factory has its own terminology in which to express numbers. These are principally throughput and waste. However, there is one issue that needs to be clarified. Volume produced used to be described as output. In recent years it has been replaced by throughput – and there is an important distinction in operation here. Output is simply what has been made. Throughput is what has been produced and sold (there are some who make a practice of defining throughput as saleable product, but this begs a question: it may never find a buyer).

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There is of course an element that is missing. It is assumed that goods have been sold at a price that includes an adequate profit margin. It sometimes happens that managers who have made the product are kept in the dark about this figure, supposedly on grounds of confidentiality.

Percentages Percentages are part of the lingua franca of middle managers, who represent the overwhelming majority that sport the manager badge. There are situations where percentages are undoubtedly the best unit to use, especially where they can serve as a lowest common denominator where a number of different items are being counted. However, the use of percentages can have drawbacks. It can mislead. A company may report that the number staff dealing with customer complaints has increased by 100 per cent. This may be announced in order to impress, but there may have been no more than two people executing these tasks in the first place. They can cause problems in interpretation. In many corporations, numbers are collected locally and then fed into the corporate system. These are processed and reemerge as percentages which are distributed to managers. When this information is received, it is not uncommon to come across managers in a huddle, poring over a printout. The figures report the performance over the previous week. It tells them that throughput is down by 2.5 per cent for that period. The discussion that ensues goes like this: Tony: ‘We are badly down on throughput for the week. That’s due to the breakdown we had on Wednesday’s night shift. The Kolmar was down a good hour.’ Nick disagrees: ‘No, it’s more likely to have been the jam on the conveyor on line 5. That happened at the shift changeover on Thursday.’ Malcolm has another explanation for lost production: ‘We ran out of trays on line 3. This happened twice. Altogether we must have lost 45 minutes.’ Clearly there is scope for improvement in the way data is reported when the principal outcome of figures handed out to measure performance is collective head scratching. Now here is the irony in all this. Some of the raw data that has been fed into the system as numbers would have been able to tell them what caused what. Once it has been recycled by the system and re-emerges as official data – in this case in percentage format – managers may be left in the dark groping for explanations.

Money Terms As noted, many figures expressed as numbers can be converted into money terms. Although there are often benefits to be gained from doing this, as reported in the preceding pages, this is rarely done. However, at corporate level of course nothing else will do. You will find few figures expressed as percentages in the annual company report.

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The Aims of Performance Measures These have three objectives: 1. To evaluate performance 2. To pinpoint the causes of underachievement 3. To effect improvement.

Evaluating performance This objective might appear straightforward, but given the probability that the current year’s corporate targets may have been set at a certain level (although those in charge were unsure at the time whether the resources available and market conditions made them achievable), evaluation may prove to be problematic. This risk will be even higher where ambitious targets are the result of pressures exerted principally by City analysts, as is nowadays often the case. The hazards will be increased where, as with the managers at Motco, they are subject to annually imposed escalator targets.

Pinpointing the causes of underachievement Without the knowledge of the causes of underperformance, you are unlikely to progress. Yet, as has been seen, there are many organisations that limp on year after year while the source of recurring disruption remain undetected.

Effecting improvement It is evident that without a satisfactory prognosis, improvement will be limited. The merits of the different systems for performance measurement will depend mainly on the extent to which they match these objectives. There are four principal systems: 1. 2. 3. 4.

Overall equipment effectiveness Yield Productivity Key performance indicators (KPIs)

Overall Equipment Effectiveness Overall equipment effectiveness (OEE) is close to being accepted as an internationally accepted standard of measurement for factories. Most OEE systems provide for measurement of throughput and waste. There are, however, variations. Firms engaged in processing materials often add a third category that is designed to record the availability of equipment to produce. There is a good reason for this inclusion, for a feature that is distinctive about this branch of manufacture is that the failure of one piece of equipment can bring the whole process to a halt. So it makes sense to add on to throughput and waste a third slot in which to register this cause of lost production. It is designed to focus attention on this issue and serves to underline the urgency of pinpointing what has caused this disruption.

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There are other branches of manufacture in which equipment failure is less important. In mainstream engineering machines often run in parallel and so if one fails production can usually be switched to another. If the manufacturing process is held up, the cause is more likely to be the absence of a component part.

Yield and Productivity Measurement of yield and productivity share common ground. Yield fits in neatly with the productivity model (Chapter 6) with inputs and outputs linked by the conversion process. There is however one important difference. Take bread once again. The input will be ingredients, principally flour. The output is bread in a variety of forms: it may be loaves, rolls, buns or baguettes. You can put a price on the value of both inputs and outputs. However, there is one flaw. Assume that the yield is down by 0.05 per cent. Because you are only measuring at the points of input and exit, the yield will provide you with no information which will enable you to pin down the causes. It is here that yield and productivity diverge. For as has been seen, the process chain is divided into stages at which data can be recorded. You can take readings at each stage. It is at one or more of these that the explanation of the shortfall will be found.

How to Use Key Performance Indicators These represent an alternative approach to the measurement of performance. range of application

They may be applied to measure performance across the whole organisation or to parts of it. There is also scope to employ indicators to measure the achievement of service companies to which activities have been outsourced. deciding what is key

The difference is not always made clear. Amid the welter of acronyms that pepper theories about performance indicators, there is just one that matters. A critical success factor (CSF) is that key element which determines whether or not the organisation will achieve its central goal. So there will be no more than one of these in any business organisation. On the other hand, there are likely to be a number of KPIs. Take an airline. The critical factor is the proportion of seats that are filled by passengers (known as the load factor.) There are several considerations that may affect the decision of a would-be passenger to fly with one carrier rather than another. Its reputation for punctuality will count for much. If the airline gains a reputation for frequently delayed departures and late arrivals this will not figure as an asset in filling seats. So minimising delayed flights qualifies as a KPI. However, it does not warrant elevating into the critical success factor. Or take a supermarket, where the critical success factor will be to sell as many highmargin goods as required to make the profit forecast. To achieve this aim, this merchandise must be readily available and put on prominent display. This will mean that care has to be taken as to where they are best placed to catch the eye (such as adult eye level). However, those in charge of a supermarket branch are likely to be keeping a close watch on the process flow. Congestion at the tills will delay the transfer of money, and

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finding ways to speed up the passage of customers through the checkouts may risk supplanting the real critical factor – persuading them to buy big-ticket items.

What to Measure the musts

To measure you need figures and indicators need to be expressed numerically in some form. It may be numbers alone or it may be percentages or ratios. Some of the champions of KPIs argue that their advantage lies in being a non-financial measure. This is not obvious. There are key ratios in traditional corporate accounting: return on capital, return on net assets, sales revenue per employee and debt to equity ratios are figures that have been used for a very long time. Ratios can be usefully applied as indicators in many areas: for example, sales expenses as a percentage of sales to sales staff is a measure commonly used. Some companies have found IT expenses as a proportion of total administration costs a revealing figure. Other examples of hard figures are defective goods received and returned (dead on arrival) including those found to be defective within first 90 days.

What Not to Measure It is common to draw a distinction between ‘soft’ and ‘hard’ indicators, for example figures. So-called soft indicators do not provide suitable material for measures – such a measure may be designed to assess employee satisfaction. Much of the data used for soft indicators is drawn from questionnaires which invite people to respond to queries on issues such as how involved they feel and how well they understand corporate objectives. An indicator based on a percentage of responses and said to reflect the condition of employee morale clearly lacks the sharpness of operational measures.

Data Unrelated to Performance A common practice is to keep a record of certain events and to use these as indicators. For example, some firms record the number of days spent by staff attending training courses. Unless the results of the training can be measured – and there are few forms of training where this can be done – the practice of collecting these figures tells you nothing about performance. Or take Marflow where indicators included the number of visits by sales staff to ‘high-value’ customers. But not all such visits may prove to be productive. Zipfax, an engineering firm making fasteners, was a high-value customer. It had received a series of late deliveries from supplier Marflow and the production manager complained to Sam, a senior marketing executive of Marflow. Sam made a number of visits and his customer had received soothing assurances that deliveries would improve, but effecting an improvement was not up to Sam. Eventually, the managing director of of Zipfax had a word with his counterpart at his supplier, who until then had been unaware of the problem. The number of late deliveries dropped sharply. Now there was a positive and measurable outcome, but in getting this result, visits by the marketing executive have played no part. Even so, he has been meeting his target of visits to high-value customers – which serves to show that simply recording events makes no contribution to performance or to its measurement.

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Avoid Using the Language of Efficiencies It is common for a list of KPIs to be larded with expressions drawn from SAD, such as ‘increasing labour efficiency’. As has been observed earlier, these are apt to harbour serious shortcomings as an instrument for measurement.

Communicating KPIs Many companies restrict the communication of KPIs to managers at a defined level. Such policies are open to question. KPIs should be communicated to all whose efforts can affect matching the requirements of a critical success factor. In the case of filling aircraft seats, that could mean a lot of people.

Common Shortcomings in the Application of KPIs Often KPIs are cobbled together without sufficient forethought and without consulting many of those on whom performance depends. It is common that the distinction between critical factors and KPIs is not sufficiently understood. It is also common for indicators to be couched in the language of efficiencies, but experience indicates that it is not unusual for different indicators to conflict. Where other systems of measurement are also used in parallel, it is common for these to be used at the expense of KPIs.

How Many Indicators? A question often asked is how many KPIs there should be – academics have plenty to say on this issue. In practice, the numbers employed vary widely. I have known companies that get by on less than a handful. At the top end is a firm that has 64, and whose chief executive has resolutely declined to accept advice to reduce the number. The only answer to the question of how many is: as many as you need for effective measurement of performance.

League Tables and Performance Review Making Comparisons There is nothing new about league tables. They have been used in business organisations for a very long time. They first spread to the public sector under the Thatcher government and the trend accelerated under those that followed. As will be seen shortly, the motives of those employing league tables vary. Some are reputable, others less so. Their defining characteristic is that they are indisputably a top-down device that meshes easily with the command organisation model. They are designed to enable those at the top to make judgements about the performance of those beneath them. The reputable argument in their favour is this. If you compare the achievement of different units that share common features, the argument goes, you can establish which

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is the best performer then encourage the lower achiever to emulate the higher performer. There is a theoretical possibility that this will work, so long as a number of conditions are fulfilled:

• First, that the low performer is persuaded that the superior achievement of the high performer is genuine, which means that the measures applied are accurate.

• Secondly, a low performer must be persuaded that the comparison is fair and that the high achiever has no advantage that is unavailable to its rival.

• Finally, that the motives of those in charge are genuinely to encourage the low performer to reach the level of achievement of the other. League tables are a practice that has given rise to controversy, especially in the public sector. Their merits are rarely visible to those whose performance is being compared and there are many who are outside the world of comparisons who question their value. You do not have to look far for the reasons. It is because one or more of the foregoing conditions have not been observed.

The Validity of Measures It is common for those affected to distrust the accuracy of the measures that are being applied. This is common in both private and public sectors.

Unfair Advantages Wherever comparisons are the subject of conversation amongst managers and mention is made of a unit that is seen to be performing better than others, it is sure to trigger the response: ‘Yes, but …’. You will then hear about the advantages said to be enjoyed by the alleged high performer. These will be real or apparent, but this perception of natural advantage is potentially corrosive. If the comparison is seen to be unfair this can be profoundly demotivating.

The Motives of those in Charge The presence of the wrong motives will destroy any potential that league tables may have to deliver benefits. The quality of the comparison regime will be decisive in this respect.

The Comparison Regime Some organisation chiefs view league tables as a handy device for increasing competition. Because managers generally are already competitive by nature, the use of league tables will hammer in the last nail in the notion of management as a team. There may be another motive. The crude assumption is sometimes made that performance will be enhanced by dangling the prospect of humiliation in the shape of the corporate pillory and wearing the dunce’s cap. The outcome, as noted at Motco, was, in the words of its managers, to ‘fake, fudge and fabricate’ the figures.

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Apples and Pears It should be clear by now that employing the practice of league tables is not free from the risk of causing more harm than good, but it harbours a fundamental flaw that lies deeper than the others. The clue is to be found in the common perception that in any comparison, some entities will enjoy an advantage that gives them a head start over the others. The truth is that there are few units that are identical in all respects. This is the case at all levels: organisations, branches, departments and even at the level where the basic tasks are done. They may look alike, but there are usually differences between them – and in terms of performance this difference can be decisive. A multinational company whose business is to install elevators compared the performance of its operations in the European countries where it has a presence. The British subsidiary fared badly in comparison with its neighbours because typically the way buildings in the UK have been constructed leaves less space for lift shafts and for access to them compared with those of other European countries. Again, the problems faced by Martin at Aeroflex have been noted, in being compared with his counterparts who were running factories with shorter cycle times. Descend to the level where basic tasks are done and the picture is no different. Take two machines in any factory. They look identical and they are used to make the same product. But machine A had a key part replaced last year. The comparable component on machine B is ten years old. Not surprising, therefore, that they perform differently. In one respect comparisons at this level have wider implications in terms of measures. One piece of accounting doctrine underlines the importance of what it calls ‘labour efficiencies’. This shines a spotlight on the costs of employing people (‘directs’ in the antique vernacular) making products. It might compare the performance of two lines producing the same item. If more workpeople are employed running line 1 than line 2 questions will be asked – yet the reason for the additional workers will be that line 1 is sufficiently different to require the additional workman. In a factory producing foodstuffs the pursuit of labour efficiencies proved costly. There were two production lines which appeared to be similar. One was manned by five workmen, the other by six. To increase efficiencies the number on line 2 was reduced to 5. This reduction increased the pressure on the remaining crew of five. Shortly after the change had been made, one workman left. Because of the cumbrous company procedures for recruitment it was three months before a replacement could be found. A month after the reduction in the size of the crew, another workman – the ablest member of the team – became unfit for a time with severe back strain. The two absent workmen were replaced by temporary workers who had first to be trained to do the job by colleagues who understandably found it difficult to find the time this required. Production dropped sharply and this was apparent on the weekly printouts handed out to all managers. What was missing was a mention of the reasons for the shortfall, much less the part played by the search for labour efficiencies. Such was the outcome of the assumption made that two production lines were the same when they were not.

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A Constructive Use of Comparisons If a unit is performing better than others it is in the interests of everybody that others should be given the opportunity to learn how this success has been accomplished. However, before the necessary arrangements for a pilgrimage are made, an audit should first be conducted to:

• check the validity of the measures applied; • make sure that the high performer does not have an advantage that others are denied; • pinpoint the reasons for its high performance.

Conclusion Regardless of their current popularity, in the measurement toolkit league tables have no place. For the reasons outlined above, no matter how they are deployed, they are unreliable as indicators of performance and lack the capacity to make any measurable contribution to the achievement of the common goal.

The Practice of Performance Review Arrangements for measuring individual performance are usually known as performance review or performance appraisal. This has two elements. There is a dialogue, one-to-one, between a manager and each of their subordinates. This is sometimes called an appraisal interview and usually takes place once a year. Following the discussion about performance observations are committed to paper by the manager. This usually takes the shape of filling in a form, the purpose of which is to ensure all managers answer the same questions: this in the interest of achieving consistency across the organisation. The forms often instruct a manager to make an entry setting out his underling’s needs in terms of training and personal development. In my experience it is not unusual for a manager to struggle to find something to recommend under this heading. The completed form is usually deposited with a specified department, which is usually known as personnel or human resources (HR). As the custodians of these documents, which are said to record the judgements of an individual performance, they are expected to produce this written evidence when a person is being considered for promotion. Sometimes the HR department consider that they control the levers of a machine that works with the efficiency of a well-oiled engine. As will be seen shortly, evidence shows the reverse. The reality is that this practice has a number of shortcomings. The observations that follow are based on published research and on my personal experience when I spent some time working in this field. This comprises two different episodes. One was that of running training courses designed to enhance the performance appraisal skills of 100 managers at a company which is a major defence contractor. Although the training courses were judged by the client to achieve their aim, as the programme progressed I became increasingly uneasy about its value to those taking part.

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These doubts were reinforced by the results of a survey in which I took part, conducted in 18 engineering firms. The aim of the survey was to assess how well performance review was working in practice. Managers and staff were interviewed in all of these firms. The findings of this exercise were these. Of the 18 firms claiming to practise performance review, it was considered to be working well in only one firm in all departments. In another it was effective in one of three principal functions – manufacture, marketing and research. In the remaining 16 it was judged to be either not working well or not working at all. In the companies where it was happening but judged to be ineffective criticisms made about the conduct of performance review were these:

• Managers were seen to be reluctant to criticise subordinates for fear of damaging working relationships.

• It was common for subordinates to doubt the honesty and sincerity of their managers when discussing performance.

• Managers sometimes made promises to take action as a result of issues discussed but action rarely followed.

• Managers resented the amount of time that had to be spent on the exercise, particularly the paperwork that went with it. A sizeable number of mangers reported that they were not prepared to commit to paper any comment that might be misinterpreted as critical of an underling’s performance in case it was misused by the department where completed forms were filed. In the words of a senior manager, ‘I am not prepared to chisel the epitaph on the career of anybody who works for me – even if his performance is pedestrian.’ In a nutshell: the majority view amongst those taking part was that any benefits derived from the practice of performance review were hard to discern. In addition to criticisms of the practice of performance review which were ventilated in the survey, there is another – and it has far wider implications.

The Sigmund Solution The deepest potential flaw was pointed out to me at a meeting with the managers of an engineering company located in the Thames Valley and called Sigmunds. It made pumps for use in irrigation projects. I had got to know the management team well. The company did not practise formal performance review and I had been invited to discuss the issue with them. Ed, the most senior member at the meeting, presented a picture of what might happen if the standard practice were to be introduced. He said something like: ‘OK, so we introduce performance review. I have five managers who report to me directly. I meet with each of them one at a time.’ ‘First comes Tom. We agree that his performance could have been better. He tells me that the reason he has not done as well as he had hoped was because he has been let down by colleague Dick. So next I see Dick. He admits he could have done better but he complains of lack of support not only from Tom but from Harry as well. And so it goes on – an endless belt of finger pointing.’

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‘So at the end of the exercise I will have the results of five meetings. There will be two conclusions. One, that each of my managers is blaming his colleagues for his failure to deliver the bacon. The second is that I have not got an answer and that this is my fault.’ I was amazed at Ed’s analysis and the clarity of his prediction of what might happen. ‘So, what do you reckon is the answer, Ed?’, I asked. It was Robin, one of Ed’s real managers who replied. ‘If we are going to do this thing there is no point in doing it one to one. Ed has to do it with all of us together.’ ‘Can you see any drawbacks?’ I asked. Ed said: ‘Yes, plenty. Some of us are going to get hurt. But it’s obvious that there is no other way of doing it.’ This had not been my idea. However, I had not been able to see any way around the dilemmas created by the conventional model. Ed was as good as his word. Next time I went to see him I asked him how it had gone. He grinned. ‘It wasn’t easy to start with. There was nobody there that didn’t find himself wincing at times. There was a lot that came out of the woodwork. The point is this. We have meetings as a matter of routine. But this was different. Issues came up that would never have surfaced otherwise. We have decided to repeat the exercise every three months.’ Ed handed me a piece of paper which was the agenda of the next meeting. This was as follows: 1. 2. 3. 4. 5. 6. 7.

How have the five of us performed collectively over the period? What are the reasons for any shortfalls? How many of these were within our control? What can the five of us do to get a better result by the end of the next period? What help do managers need to achieve the agreed objectives? What data do we need to receive regularly that is not currently available? What data do we need before each peer review meeting?

This was the way Sigmunds managers decided to review their performance. It worked well for them. This was their decision. It might not suit everyone, but if those in charge want performance review to achieve its stated objective they will be well advised to take a good hard look at the system they have and if it is not working as it should, to look for a better way.

chapter

9 Conclusion

The purpose of this book has been to survey existing methods of measuring performance in order to assess how effective they are; to identify any shortcomings; and to propose improvements where they are needed. The first requirement is a reminder as to the objectives of performance measurement; secondly, as to the consequences of the application of measures. The central aim of performance measurement is to provide the information needed to exercise control. The methods used can determine the behaviour of those who are subject to their application.

Traditional Methods The most widely used measure of performance is that of standard accounting doctrine (SAD)which leans heavily on the traditional command organisation model, as expounded by Urwick, as its preferred instrument for the exercise of control. Control is viewed as the key to efficiency, the concept that serves as the foundation on which both doctrines rest.

How Effective has it Proved to be? The extent to which it is effective is influenced by four factors: 1. 2. 3. 4.

Prescription; Insulation from criticism; A restricted agenda; and Disregard for key elements.

Prescription It is the essence of both doctrines that they prescribe how things should be done. This gives rise to a central dilemma. What if what happens does not match the prescription? This has far-reaching implications for the measurement of performance. As has been seen, it harbours the risk that effort is invested in assessing work that is not directed to the corporate goal. Conversely, some key events go unmeasured.

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Insulation from Criticism Standard accounting doctrine incorporates a number of precepts that are fundamental to its case, such as that people will not work well unless closely supervised. These principles have been regarded as beyond challenge. A substantial volume of objective evidence that has accumulated and questions their validity has been disregarded.

A Restricted Agenda The exclusive focus of SAD is the budget, derivative targets and the corporate plan.

Disregard for Key Elements Standard accounting doctrine has disregarded some key factors that affect the measurement of performance. Of these the most prominent are:

• The power of the forces that tend to pull different parts of an organisation in different directions (indeed, unwittingly, doctrine reinforces this trend, principally in pursuit of least unit cost); • The critical function of the process chain as the motor that drives effort to achieve the central goal. It is ironic that it is the process chain that is central to a model that serves as an alternative to the traditional concept of efficiency.

Advantages of Productivity as a Model The advantages of the productivity model are these:

• It has the capacity to achieve the principal aims that remain out of the reach of standard doctrine: effective planning, coordination and, above all, control;

• It is able to encompass other key corporate activities that have eluded the attention of orthodox doctrine: the capacity of an organisation to respond to external events, technical innovation and improvement in general. With SAD the nearest thing to an output is the execution or non-execution of the corporate plan. Further, all that can be measured is the difference (variance) between what was planned and what has been achieved (the actual). Productivity affords the advantage that all three of its elements can be measured: inputs, outputs and the conversion of one into the other. In other words, the span of measurement is infinitely wider. Within all of these three dimensions of productivity the same rule applies: what cannnot be measured does not count. Within the process of transformation from inputs to outputs there is another rule that applies – the contribution test. It should be applied to both people and activities, such as the purchase of services from outside. If the results of these cannot be measured, they should be discarded.

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Data When? Standard accounting doctrine sees as its central task the provision of historic data. An obvious disadvantage of this emphasis is that its receipt is sometimes too late to permit remedial action to be taken. It is here that productivity displays the upper hand. The fact that the process chain divides naturally into sequential stages enables data to be recorded day-to-day as things happen at each of these stages. This of course is what is required to take prompt corrective action. The achievement of the Topbread team was the subject of Chapter 1 of this book. There is nothing complex about the formula that accounted for their success: to receive accurate performance data at the right time and to have access to the resources needed for prompt remedial action where things are not going as planned. It has been shown that in some commercial organisations data is regularly gathered at the local level but that instead of its being used at this point, it is more usually fed into a corporate information system which, having recycled it, issues the result in a form that does not always meet the needs of those seeking to exercise control. The question was posed: if the Topbread team were able to exercise effective control at local level, why could the same formula not be applied company-wide? It has been a purpose of this book to show that while the obstacles that lie in the way are formidable, none of these are beyond the wit of man – including organisation chiefs – to surmount.

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References Bicheno, John (2000) The Lean Toolbox, 2nd edn. PICSIE Books. Brown, Wilfred (1961) An Exploration in Management. London: Heinemann Educational Books. Burns, Tom and Stalker, G.M. (1994) The Management of Innovation. Oxford: Oxford University Press. Carlsson, Sune (1953) Executive Behaviour. Publisher not known. Drucker, Peter (1951) The Practice of Management. Harmondsworth: Penguin. Drury, Colin (2008) Cost and Management Accounting, 7th edn. Andover: Cengage Learning. Goldratt, Eliyahu M. and Cox, Jeff (2004) The Goal: A Process of Ongoing Improvement, 3rd edn. Farnham: Gower Publishing. Jenkins, David (1996) Managing Empowerment. Random House. Lippitt, Gordon (1969) Organisational Renewal. Chichester: Wiley. Management Today (1982) Management Today, March. Nakajima, Seiichi (1989) TPM Development Program. Productivity Press. Roll, Eric (1955) Elements of Economic Theory. Oxford University Press. Smith, Debra (2001) The Measurement Nightmare. CRC. Stewart, Rosemary (1997) The Reality of Management, 3rd edn. Butterworth-Heinemann. Taylor, Frederick (1911) Scientific Management. Publisher unknown. Urwick, Lyndall (1944) Elements of Administration. Publisher unknown. Walker, Charles and Guest, Robert (1952) The Man on the Assembly Line. Cambridge, MA: Harvard University Press.

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Index

ad hoc services 92–3 Aeroflex 118–19 after-sales services 98–9 aims of performance measures 122–5 Akwa Water Services (AWS) 43 apathy in the workplace 115 appraisals 128–30 Aristotle 14 assets, value of 15 behaviour engineering 30–1 explicit/implicit assumptions about 30 impact of measurement on 5–6 brands, value of 15–16 British Airways 92 Brown, Wilfred 113 budgets as corporate scramble 35–8 reform of SAD 72–4 and standard accounting doctrine 23–4, 35–8 centrifuges, organisations as 42 command model as basis of standard accounting doctrine 19 principal features of 19–21 process chain, cost of in 61–4 as source of constraints 116 comparison of units 125–8 computers, misplaced reliance on 48 confrontational management 32–3 contribution test 112 control, using measures to restore 76–80 conversion process specification 83–4 coordination and budgets 24 reform of SAD 74–6

and standard accounting doctrine 24, 42–4 correct methods, importance of in SAD 22 corrective action, improving 89 cost centres 69 costs of flaws in plans 47–9 of inventory 48–9 critical success factors (CSFs) 123 Dairex 109 data accurate reporting of 117–19 assessment of systems 119–20 collection and delivery of 9 inadequate 56–7 lack of 117 need for 3–5 quality needed 9–11 recording of 133 Topbread 10–11 Dawes Fluid Systems 91–2 delivery and responsiveness 99–100 denationalisation of public assets 16–17 disruption to process chain corrective action, speeding up 89 cost of 54–61 equipment failure 54–5 frequency, amount and duration of 58 identification of causes 57 inability to take corrective action 57–8 inadequate data 56–7 inadequate planning 56 long-term causes 56–61 missing parts 55–6 response of managers to 58–61 short-term causes 54–6 surrender to 59–61

138 M e a s u r i n g P e r f o r m a n c e educational achievement 41 engineering behaviour 30–1 equipment effectiveness, overall 122–3 equipment failure 54–5 escalator targets 12–13 exchange value 14, 15 Exploration of Management, An (Brown) 113 firefighting 76–80 Ford, supervisors’ role at 64–6 G-Med 70 Gate Gourmet 92 groups as source of ideas 108–9

quality needed 9–11 recording of 133 Topbread 10–11 information technology (IT), misplaced reliance on 48 innovation application of ideas 105 breakthrough or hard graft 102–4 compared to improvement 105–6 control of R&D 104–5 measuring 101–5 success/failure in 102 inventory, costs of keeping 48–9, 71 just in time systems 48

Harrier jump jet 104 Hayward, Tony 113 Hi-wire International 42 hierarchy 32 ideas filtering of 107–8 groups as source of 108–9 measuring value of 109–12 suggestion schemes 107–8 undermining of 106 wide spread of sources 105–6 ideology behind standard accounting doctrine 29–31 improvement criteria for organisations 113–14 filtering of ideas 107–8 groups as source of ideas 108–9 measuring 105–6 measuring value of ideas 109–12 roles and responsibilities, clarity in 112–13 suggestion schemes 107–8 undermining of ideas 106 inertia 31, 97–8, 115 information accurate reporting of 117–19 assessment of systems 119–20 collection and delivery of 9 inadequate 56–7 lack of 117 need for 3–5

kanban systems 48 key performance indicators (KPIs) 123–5 labour efficiencies 127 as source of value 14–15 utilisation 47 working out cost of 29 leadership and motivation 39–41 league tables 125–8 Limitex 100 local objectives, pursuit of 42–4 lowest unit cost 70–2 management confrontational 32–3 impact of measures on behaviour 6 top, pressures on 38–9 management by objectives background to 8 difficulties with 11–13 escalator targets 12–13 manipulation of behaviour 30–1 manufacturing and responsiveness 99 Marx, Karl 14 materials model for standards setting 28–9 maximum machine utilisation 47–8, 72 measurement behaviour, impact of 5–6 collection and delivery of data 9 difficulties with 11–13

I n d e x 139 information, need for 3–5 management by objectives 8, 11–13 numbers, concern with 7 observation, difficulties with 7–8 personal experience, using 8 quality of data 9–11 readiness to respond 7 Topbread 10–11, 13 value as a measure 13–17 of the wrong things 5 mergers and acquisitions 16 Mill, James 15 missing parts 55–6 money as unit of measurement 121 monitoring of performance 20–1, 32 motivation achieving 114–15 and budgets 24 and leadership 39–41 measuring 115–16 and standard accounting doctrine 39–41 negative, emphasis on 32 Norsk Hydro 75 numbers, concern with 7 numbers as unit of measurement 120–1 objectives, management by background 8 difficulties with 11–13 escalator targets 12–13 objectives of performance measures 122–5 observation of work, modern difficulties with 7–8 organisation development 31 outputs specifications 83 outsourcing 90–3 overall equipment effectiveness (OEE) 122–3 overheads 67–9 Pakrak 61–2 passivity in the workplace 115 Pavlov, Ivan 31 people as resources 84–5 percentages as unit of measurement 121 performance reviews 128–30

personal experience, using for measurement 8 pharmaceutical industry 104 plans/plannings and budgets 23–4 catching up/getting ahead, problems with 46 changing goalposts 45 costs of flaws in 47–9 good short-term 75 inadequate 56 inventory, costs of keeping 48–9 kanban 48 labour utilisation 47 maximum machine utilisation 47–8 misplaced reliance on IT 48 reform of SAD 74–6 segregation of from execution 45–6 short-term 45, 88 standard accounting doctrine 23–4, 45–9 process chain advantages of 51–2 command model, cost of 61–4 cost of disruption to 54–61 equipment failure 54–5 frequency, amount and duration of disruption 58 function of 52–3 identification of disruption causes 57 inability to take corrective action 57–8 missing parts 55–6 response of managers to disruption 58–61 stages in 54 supervisors’ role at Ford 64–6 surrender to disruption 59–61 and systems 53 productivity advantages of as model 132 basis of 81 compared to yield 123 conversion process specification 83–4 definitions 82–4 emergence of 81 goal of 82 measuring changes in 94–5

140 M e a s u r i n g P e r f o r m a n c e outputs specifications 83, 87 outsourcing 90–3 resources specification 83 SAD compared to 94–5 short-term planning, improving 88 supply chain 82 value chain 86–7 waste minimisation 89–90 qualifications 41 rank and order 32 readiness to respond 7 reform of standard accounting doctrine budgets 72–4 control, using measures to restore 76–80 coordination 74–6 cost centres 69 lowest unit cost 70–2 maximum machine utilisation 72 overheads 67–9 planning 74–6 standard hours 72 target setting 74 variance reporting 71–2 research and development, control of 104–5 resources defining and recognising 84–5 people as 84–5 specification of 83 responsiveness after-sales services 98–9 delivery 99–100 limits on 100–1 manufacturing 99 measuring 97–101 roles and responsibilities, clarity in 112–13 Sainsbury’s 90 scientific management 21–3 Sigmunds 129–30 Silentbloc 62–4 Smith, Adam 14 standard accounting doctrine budgets 23–4, 35–8 command model as basis of 19–21, 32

confrontational management 32–3 coordination 24, 42–4 correct methods, importance of 22 creation of experts 22 hierarchy 32 ideology behind 29–31 impact of Frederick Taylor 21 implications of difficulties with 49 inertia 31 labour, working out cost of 29 limited effectiveness of 131–2 local objectives, pursuit of 42–4 and motivation 39–41 negative, emphasis on 32 plans/plannings 23–4, 45–9 productivity compared to 94–5 scientific management 21–3 standards, setting 27–9 target setting 24–7, 38–9 see also reform of standard accounting doctrine standard hours 72 standards, setting 27–9 suggestion schemes 107–8 supervisors clarity in role of, need for 112–13 impact of measures on behaviour 6 need for under command model 20–1, 32 role at Ford 64–6 supply chain 82 takeovers 16 target setting background 8 difficulties with 11–13 escalator targets 12–13 limitations of for motivation 114–15 pressures on top management 38–9 reform of SAD 74 and standard accounting doctrine 24–7, 38–9 Taylor, Frederick 21 time and motion 21–3 Timex 102–3, 104 top management, pressures on 38–9 Topbread 10–11, 13

I n d e x 141 Toshiba 103 training measuring results of 93 as motivation 40–1 units of measurement 120–1 Urwick, Lyndall, Colonel 19 value as a measure assets, value of 15 brands, value of 15–16

of a company in a takeover 16 denationalisation of public assets 16–17 emergence of 13–14 exchange value 14, 15 labour as source of value 14–15 value chain 86–7 variance reporting 71–2 waste 89–90 yield 123