Tuesday, August 26, 2008

A short break

I am finishing a current assignment at the end of the month. A little later I go to China. So I will not be posting again until I get back.

Saturday, August 23, 2008

Use and abuse of the word governance

Perhaps I am getting too crabby, but I have come to detest the use - more properly the misuse - of the word governance.

I first became aware of the word in a private sector context. Here we were talking about the way a board governed a company. Since then, the word has spread across every sector and downwards in organisations to cover a wide variety of activities.

The difficulty with the present use of the word lies in its broad application independent of circumstance to the point that it has in fact become confusing and misleading.

To illustrate what I mean, take the use of the word in a project context. We now talk of project governance when we actually mean project management arrangements.

As I said, I may just be getting crabby. But it does annoy me!

Tuesday, August 19, 2008

End of the IT revolution - or a new beginning?

In my post End of the IT revolution - organisational rigidity I pointed to some of the reasons why modern organisations are losing the ability to take advantage of the new technology. My bottom line was:

The net effect in many organisations I know is that the new technology, and especially the internet, becomes something to be controlled rather than managed.

In a comment on the post Bruno Fiorentini said in part:

In the real modern organizations, the network should not be so rigid and would have appropriate areas where employees and customers could share and expose ideas....The collaborative and open process provided by the internet environment is the true spirit that should reign in the networks. The companies that understand that and do not fear to be open will really benefit from this concept...

Bruno is right. But how to make it happen? I think that four things are key.

I think that the first key step here is to free up things behind the firewall. If you give greater freedom to experiment here, then you can test things in a controlled environment.

The second key step is to trial things externally on a pilot basis. If you want to do new things with customers, then test them. But do keep things as simple as possible.

The third key is to create a budget that will support experimentation. This need not be large. The key thing is that it should be accessible without heavily formalised control procedures.

The final key is to turn your IT area from a control to a facilitation, support function.

Four little steps. They just require a change in approach.

Thursday, August 14, 2008

Inflation's mechanics - and the importance of improving productivity

It seems hard to believe that just two years ago some business commentators were suggesting that the inflationary problem was behind us. The world was on a sustained low inflation growth trajectory. Now we have the return of inflation in combination with slow growth, something we have not really seen the 1970s.

Inflation's mechanics rest on supply and demand. The policy response is far more complex.

Prices rise as demand rises. This draws out more supply, but with a lag. In the first instance, business uses spare capacity to meet increased demand. Beyond this point, new investment is required to build greater capacity. This adds to demand and to prices.

As capacity increases, so does production. This places downward pressure on prices. Sustained inflation occurs when increasing demand stays in front of increasing production capacity.

The only way to stop this is to reduce demand. However, this is where things get complicated.

Monetary policy, increased interest rates, is the usual weapon adopted by central banks. As interest rates rise, funding whether for consumption or investment drops. This leads to reduced demand, placing downward pressure on prices.

So far so good. However, the story does not stop here. This is where things get complicated.

In a global world, the capacity of individual countries to control prices is affected by events elsewhere. With global inflation, import prices rise. These rises may be offset to some degree if, as happened in the Australian case, rises in interest rates help strengthen the currency. This helps consumers, but can further reduces demand because of its impact on exports and domestic production.

The economy slows. Now things get really complicated because inflationary pressures do not end at once. Central banks now face a delicate balancing act: reduce interest rates to help increase demand or hold to keep pressure on inflation.

In the past, fiscal policy was used to help control upturns and downturns. Governments are now reluctant to do this, placing greater weight on monetary policy.

Falling interest rates increase personal and business cash flows, supporting greater consumption and investment. However, they can also lead to falls in the exchange rate. To some degree this adds to domestic demand, but it also increases local price pressures. Further price pressure may emerge as local demand begins to increase again.

To my mind, the big conundrum in all this is just how to ensure that prices stay down as growth resumes. To my mind, the answer has to lie in keeping productivity growth faster than the rise in input costs, including wages.

The old comparative statics model suggested that in the first stages of the upturn the existence of spare capacity meant that productivity would automatically rise faster than input costs. However, this effect comes to an end as that spare capacity is soaked up. Price pressures then re-emerge, leading to another downturn.

One distinctive feature of the last growth wave was its sheer length. This was supported by a long period of above average productivity growth. If this is correct, then a key issue becomes what might lead to another such productivity wave.

I am far from certain that I have an answer here at either national or international levels.

Saturday, August 09, 2008

Mechanistic Management - the sometimes fallacy of planning

As a strategic consultant, I remain a supporter of effective planning. However, one of the interesting conclusions from Jim Collins' Good to Great was that planning did not appear to be of significance in performance terms - both good and great companies used the same planning techniques.

This would fit with my own experience. A key reason for this is the existence of what I have come to call mechanistic management, management that focuses on the application of defined processes and steps. .

Mechanistic management can work well in a stable environment. Indeed, it was in just such an environment - the growth wave of the immediate post war period - that Peter Drucker popularised the concept of strategic planning. However, in doing so, Peter Ducker made two key points.

The first was that planning was concerned with the futurity of current decisions - ensuring that future needs and directions were taken into account in now decision processes. The second was that planning was a process - what was important was the structured planning process, not so much the plan itself.

Planning can in fact do only so much. Nobody would build a bridge, plant or building without a detailed plan. Here we are dealing with physical processes that can be defined and plotted.

The position changes when we move into the world of gray created by changing technology, markets and economic conditions. Planning is still important in setting objectives, marshaling resources and identifying risks to be overcome. However, and as I suggested in my last post The resilient organisation, beyond this it is the capacity of the organisation to respond to the unexpected that really determines success or failure.

By their nature, plans are biased towards the known. In the face of change they become less effective and may become an impediment to success, even a threat to survival. This holds especially where the plan rather than the planning process has become central.

In mechanistic management, the plan becomes enshrined in stone - this is what we have to do, this is what we will report on, this is how we will be measured. Monthly reports, quarterly reports, individual performance reports all span out from the overall plan to create a rigid organisational skeleton. Divergences from plan become major offences. People strive to deliver on plan even though they may know that the plan itself is flawed.

We all know that the rigid centrally planned command and control economies of the communist era failed to deliver. I am not quite sure why we think that similar techniques will now work in modern organisations despite the evidence of past failure.

This is not an attack on planning as such. I said at the outset that I remained a supporter of effective planning. But what does make make for effective planning?

To my mind, planning is most effective where it is a continuous process, where the real output is not the plan as such but the process itself. In this environment, plans sit more lightly and continually adjust to take changing circumstances into account. Divergence from plan ceases to be an offence, but instead becomes a signal that the world may be changing.

It may be that all the companies in Jim Collin's sample did use the same planning techniques. However, their application is clearly different.

In Collin's assessment, good to great companies had an open questioning culture. They engaged in dialogue and debate, not coercion, they conducted autopsies without blame, they sought to improve. This is very different from the way planning techniques are applied in the world of mechanistic management.

Tuesday, August 05, 2008

The resilient organisation

The concept of resilience, essentially the capacity to adjust, is a useful one in considering organisational change and indeed survival.

Resilience is a very different concept from the popular focus on risk management. In risk management we try to identify and manage specific risks. Risk management aims to make things more secure in an uncertain world. By contrast, resilience deals with the capacity to adjust to change whether foreseen or not.

All organisations are complex systems constantly adjusting to a changing world. If change out-runs the capacity of the organisation to respond, then the whole system may collapse. One problem here is that complexity makes the adjustment process itself complex and difficult to see. A second problem lies in what I see as the growing rigidity of modern organisations.

A few years ago I was running a planning workshop for a major organisation. Those present suggested that their organisation's IT system had become a barrier to change and growth. Leading edge in its day, there was now a growing gap between the IT system and the organisation's changing business needs.

The problem faced by those in the room lay in the fact that the IT system was absolutely central to company operations. Its replacement would be disruptive as well as very expensive. So for the present at least, they had to find ways of working round the problem.

This is an example of an identified rigidity. The problem is at least known. Others are less recognised.

In Problems of redundancy and systemic failure I suggested that there was a growing disconnect between modern organisational structures with their focus on measurement and the way people actually worked. In Systemic Rigidities in Modern Management 1 - Setting the Scene I extended my argument with a generalised public sector case study. Then in End of the IT revolution - organisational rigidity I extended the argument further looking at features of organisational IT systems.

There is nothing especially profound in these posts. However, they all deal with often un-recognised hardening of organisational arteries that work to reduce organisational resilience.

As I write this post, the Australian airline Qantas has been experiencing a series of equipment and maintenance problems. This is an airline recognised for its effective management and high safety standards. However, it is also an airline that has gone through a constant business change and cost cutting process.

The airline's profit performance has been outstanding by global standards. Now, for the first time, people are asking whether the changes within the airline have reached the point that they are creating systemic failures.


After writing this post, I did a web search on resilient organisation. Quite clearly, the concept itself is a popular one!

Postscript 2

The Australian Civil Aviation Authority has released the report of its inquiry into Qantas's maintenance standards. While praising the airlines willingness to cooperate, CASA concludes that the airline is now falling behind its own maintenance benchmarks, recommending a range of corrective actions.