UK: Heller on Management - Cock-ups can have a silver lining.

UK: Heller on Management - Cock-ups can have a silver lining. - A cock-up can be as much an opportunity as a threat, says Robert Heller, providing management is prepared to admit that it has happened and to learn from it.

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Last Updated: 31 Aug 2010

A cock-up can be as much an opportunity as a threat, says Robert Heller, providing management is prepared to admit that it has happened and to learn from it.

The theory of managerial cock-ups is the orphan of management studies. Innumerable tomes have been written on strategic triumphs and tragedies but nearly all assume that the heroes (or villains) knew what they were doing. By contrast, cock-up theory holds that management moves, not from one considered, co-ordinated ploy to the next but by isolated lurches. These are governed not by deep analysis and optimisation of resources but by impulse and unguarded optimism.

Why else would Volkswagen's Ferdinand Piech have paid £430 million for Rolls-Royce Motors without first securing its most valuable asset: literally and figuratively, the Rolls-Royce of brands? VW now faces the awesome task of filling the Crewe plant (expensively) by multiplying Bentley sales sevenfold.

Bernd Pischetsrieder, BMW's rival boss, may be licking his chops over acquiring the Rolls-Royce treasure for peanuts but BMW still has to build a brand new plant and model line, while coping with its earlier British cock-up, Rover. No sooner had the Germans moved in than their accountants transmuted Rover's profits into generous losses. It has been downhill ever since, to the latest sorry tale of lost jobs and slashed output.

Both cases illuminate a root cause of cock-ups - the possessive, imitative urge. As investment genius Warren Buffett observed in a recent colloquy with Microsoft's Bill Gates, boardroom conversation 'turns to acquisitions and mergers much more when the competitors ... are engaging in those'.

Forget whether buying Rolls-Royce or Lamborghini makes economic sense for volume producers. Once the race is on, cock-up piles on cock-up. Thus, VW lavished another small fortune on Cosworth to replace BMW engines, which will now be available after all. Yet cock-up theory doesn't dwell solely on gloom and doom. Many a management triumph has flowed from apparently false steps.

British Telecom was roundly berated in the City for losing MCI by lowering its bid after the skeletons in MCI's local phone business started to rattle and opening the door to the cheeky WorldCom counter-offer. Without that stinging defeat, however, BT could not have united its long-distance corporate business with AT&T's - a probable strategic masterstroke instead of a problematic $21 billion merger, which would have faced the usual managerial and financial problems.

Cock-up theory holds that these problems always prove much greater than either side expects. Financially, the potential killer is cost. Without doubt, the global telecommunications industry needs to coalesce but the justification for enormous prices, such as Bell Atlantic's $52 billion for GTE, rests on stock-market values and earnings projections that are highly speculative.

If actual earnings fail to cover the true cost of capital (including equity) to produce a positive economic value added (EVA), shareholder value must be eroded - which might explain the miserable events at BTR, a company substantially built on acquisitions, whose shares have underperformed the market by some 70% since early 1996.

With acquisitions, managers can always hope that, by the time the chickens come home to roost, the cock-up and its consequences will be history, swamped by intervening events. If the corporate carpet is broad enough, even gigantic mistakes can be swept underneath.

With assets of $56.5 billion and $29.6 billion respectively, VW and BMW could write off their total British commitments without disturbing any dust.

Cock-ups might well be fewer if top managements were penalised when acquisitions and other brain-waves generate negative EVAs. Bonus and long-term remuneration could be reduced in ratio to the value-eating returns. That is how many chief executives use EVA to pressurise subordinates. What is sauce for the geese should surely apply to the ganders. But cock-up theory holds that this is where the whole bungling process begins - with the lack of checks and balances on over-mighty corporate rulers.

An alert management supplies its own checks in the knowledge that cock-ups are inevitable, such as Microsoft's initial failure to appreciate the overweening importance of the internet. Gates told the colloquy that 'as an act of leadership, I had to create a sense of crisis': The error, potentially fatal, was turned into huge success, thanks to combined efforts by 'all the smart people in the company'.

Arguably, cock-ups teach invaluable lessons. Management has had its nose rubbed in the realities of the market and the economics. False assumptions are replaced by true facts. Necessary changes in people and policies are clearly indicated. Instead of hubris, that 'sense of crisis' has been created. Seen from this angle, cock-up is as much an opportunity as a threat.

So long as leadership is equated with dictatorship, however, cock-ups will not only continue unabated but organisations will fail to use them as springboards for opportunistic uplift. Then everybody suffers - except, all too often, the cockers-up.

Robert Heller was founding editor of Management Today.

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