Thursday, October 21, 2010

Weariness with competition and the search for efficiency

In October, Gail Kelly, CEO of the large Australian bank Westpac, announced further job cuts. At the same time, Forbes magazine listed her as eighth on its list of the most powerful women in the world. As it happened, one of our party in Greece was one of those made redundant as part of Mrs Kelly's cuts.

Also in October, Australian health fund NIB (a former mutual) launched an unsolicited take-over for Geelong based mutual GMHBA, an action attacked by the Sydney Morning Herald's Michael Pascoe in an article entitled How to steal a mutual. Then, on Tuesday, I was talking to old colleagues about the big staff cuts in another organisation, about the impacts this was having on performance. We also talked about high staff turnover in yet another organisation as a consequence of management problems. Today, the papers are full of the savage UK budget cuts. As I write, the proportion of the Australian workforce in temporary, casual or contact positions is higher than 50 per cent.

The $9 million that Gail Kelly spent on buying a house at Terry Hills on Sydney's Northern Beaches may sound a lot, but it is still less than her annual salary of around $10.6 million. The annual remuneration of NIB's CEO Mark Fitzgibbon at $1.14 million is a lot less than that of Mrs Kelly. Still, its not bad compared to the $495,000 he earned the year before demutualisation, not bad compared to the $870,000 he earned in 2007, the  year following.

This post is not an attack on executive salaries, although I do think that these are now, on average, out of kilter with the long term contribution of the executives concerned. Rather, it is an expression of weariness, of concern at the hidden costs associated with current management approaches.

Talking to a senior manager the other day, she said that she really could not do her job properly, that it was almost impossible to plan effectively when things were so unstable. Another manager complained that head count controls forced her to use contractors even though they were more expensive.

I have always been a supporter of the concept of continuous improvement, the idea of continuous incremental improvements. It is always possible to do better. Further, things that have worked in the past are constantly affected by organisational and market changes, leading to a requirement for change. Sometimes major change is required where there is a disconnect between the organisation as it stands and its function.

The problem I have, the reason for my weariness, is that the relentless drive to achieve efficiencies, to reduce (or at least be seen to be acting to reduce) costs, has become self-defeating. To use the jargon, the concept of efficiency has actually replaced that of effectiveness.

We can see this if we look at the concepts of fat and of redundancy.

Fat is a bad thing. We have to cut it out, to slim the organisation down. In excess, fat is a bad thing. The obese organisation becomes slower, less able to respond. Yet a degree of fat is actually not bad, because it allows managers to do new things, to respond to change.

Redundancy, the presence of surplus capacity or of fall back systems, is also a necessary thing in complex systems. As we have seen in electricity generation and distribution, you can reduce costs and increase profits by reducing redundancy. However, as you do, the chances of catastrophic systemic failure can increase.

Much of my work over recent decades has been as a strategic or management consultant. As a general rule of thumb, it is relatively easy to reduce costs. However, enhancing the organisation's longer term chances of survival is a far harder task.

At national level, I have argued that current approaches to public administration and public policy have passed their use by date. I just don't think that they work very well, for reasons that I have tried to spell out at length in past posts.            

One of the odd things here is that I find myself arguing against the very concepts that I once supported so strongly as a way of bringing about improvement. It's not that I think that the concepts themselves were wrong. Rather, that their blind, unthinking, application has become self-defeating. Still, that's another story!     


Legal Eagle said...

I so agree with you, Jim. My husband's work just retrenched a whole bunch of people despite posting a billion dollar profit. This has made morale hit rock-bottom, and everyone is wondering why they bother, and why they shouldn't go elsewhere. Meanwhile, the execs pay themselves million dollar bonuses, and don't care about the churn of employees. Do they have no long term care about the business? (<--rhetorical question, I know they don't).

Jim Belshaw said...

Interesting example, LE. I find it all so hard in a professional and personal sense.

Professionally and excluding cash and the joy of the chase, what's the point in trying to assist a client to improve things or achieve objectives when you know that almost random events are likely to invalidate your work? Or providing advice and assistance when you know that it's what the client wants but that it's probably not going to work?

I have tried to deal with some of this in my writing on professionalism, and indeed this does help, but it's still hard.

At a purely personal level,I think of it all as a blight that takes the joy out of doing. This linkes to some of our previous discussion on depression, something that has become the curse of the current age.

Perhaps the worst thing of all is knowing what will improve things, knowing how to get things done, but not able to make them stick.

Sorry for the moan.

Legal Eagle said...

No worries about moaning - we've been moaning ever since this happened about 2 months ago. The other thing is that there was barely enough staff *before* the retrenchments, and now there's definitely not enough staff to do the work demanded. It has really taken the joy out of Mr Eagle's work.

Anonymous said...


I agree with your comments, but I would go a little further on executive salaries. I think there is now a quite severe disconnect between the remuneration and the actual worth of our executive class, including the names you mention.

I accept that they are highly skilled, highly competent, but there is nothing in any way unique about their abilities. I do not wish it upon them, but a good question to ask is: if this particular person died tomorrow, what would happen to their company?

The answer, it applies to all of us, is "business as usual, after arranging for flowers".

What should matter more is their continuing legacy, for their company and their various stakeholders - and on that, I think the "results" are quite minimal, and transitory.


Jim Belshaw said...

Thanks, LE. You highlight a continuing problem: the tendency to cut resources without cutting work.

It's interesting, David. I have been thinking for a while that it might be an interesting study to focus not on comparative company performance, but on company survival over time. I wrote on this once before in the context of the way that increased corporate fragility made share investing harder.

Anonymous said...

M. Kloppers is a good (bad?) example:

In charge of a company which does nothing more than dig up stuff and ship it to people who can "add value". How can anyone in that position (brilliantly responsible for the hundreds of millions of lost value over the past couple of years) still hold his hand out for a salary - let alone a performance bonus?

Call your book Icarus and Phoenix: Crash and Burn


Jim Belshaw said...

I like the title, David.