On Management: Ancient regime

The colossal amount of corporate activity hides the fact that current management principles have outlived their use.

by Simon Caulkin, World Business
Last Updated: 23 Jul 2013

A martian looking at the business world from space would find it easy to believe that the most important element of management today is the deal. Driven by private equity, last year companies spent $3.8 trillion on mergers and acquisitions, an all-time record. This year the spending is on target to match or even beat that. If they aren't buying and selling, executives are farming out bits of their own: outsourcing deals, as major companies start offshoring business processes in earnest alongside routine IT and software applications development, are also at record levels. For these accomplishments, CEOs were paid more handsomely than ever before. In 2006, average CEO pay in the top 500 US firms was $14.8 million, 420 times that of the ordinary factory worker, compared with 42 times in 1980.

All this attests to a colossal amount of corporate activity. Yet there's a puzzle here. While evidence suggests that recent merger performance may not be quite as bad as in the past - perhaps in part because results are judged by effects on an unquenchably optimistic stockmarket - the weight of research still says that for most companies, acquiring others is a bad way to grow. Nor is outsourcing the no-brainer it is sometimes assumed to be. A UK consultancy recently reported that no less than 60% of large IT outsourcing deals it had investigated had gone wrong, either because the expected cost savings hadn't materialised or because the company found itself locked into an inflexible contract that did not allow for changed circumstances. In many cases, it would have been cheaper for the company to keep the operation in-house (but once departed the in-house expertise is almost impossible to recreate).

Finally, sky-high CEO pay is hard to justify on any score. There is no meaningful market in chief executives, there is no link between high pay and company performance, and plenty of reason to believe that it can dangerously reinforce the damaging effects of celebrity status on CEO behaviour. The recipients start to believe their own press, attribute success to their own brilliance and failure to the incompetence of others, and overestimate their ability to make good decisions.

So where do these things come from? They are the outward manifestations of a basic set of management principles that go back the best part of a century: specialisation, standardisation, planning and control, hierarchy and the primacy of extrinsic rewards. Specialisation gives us economies of scale and thus an assumption in favour of size; standardisation, specialisation's other face, ensures repeatability and permits mass manufacture; planning and control determine resource allocation to make mass production possible; hierarchy is the means through which the resource-allocation decisions are conveyed downwards; and extrinsic rewards - money in various forms - are used to lock the human element in place.

These principles have been extensively mined by generations of managers, and to considerable effect. But might it be that like any outdated paradigm, Industrial Age management principles have become a barrier to further progress rather than the pointer to the future? There are two sources that suggest this may be the case. One is what might be called the evidence-led movement. In their book Hard Facts, Dangerous Half-Truths and Total Nonsense (2006), Stanford professors Jeff Pfeffer and Robert Sutton show that many of management's most enduring cliches - that great leaders are in control, that superior results depend on star performers, that money is the best motivator - are half-truths at best, and all the more dangerous for that.

The other part of the case for the prosecution comes from research that points to the fact that there's another superlative to set alongside highest-ever pay and deal totals: highest-ever levels of customer discontent. This is evident in soaring complaints about excessive bank charges, small print, opaque cellphone and financial services charges, and outsourced customer service centres; and brand disloyalty so marked that one marketeer recently referred to consumers as "brand sluts".

True, expectations are higher than ever, but what has hoisted them there if not competitive corporate advertising? The problem is not consumers. In his famous book, The structure of scientific revolutions (1962), Thomas Kuhn described how in the late stages of its life, a paradigm progressively loses its explicatory power as it corresponds less and less with observable fact. Perhaps that's what's happening today - the excesses of the deal culture and the CEO imperium being the last throes of the old regime rather than the beginning of the new.

Kuhn, however, added a timely warning to his analysis. However frayed and threadbare the existing paradigm, it won't be given up until there's something better to put in its place. Time to get thinking.

- Simon Caulkin is a freelance business journalist.

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