Common Management Problems - combined posts

Back in November 2006 I began a series of short posts on common management problems that I had encountered as a manager or professional adviser.

I have just been updating the list. Those interested can find the entry page to the whole series here.

Australia's new minimum wage - July 2008

Some employers are crying foul over the $A21.66 increase in Australia's minimum wage, bringing the minimum weekly wage to $A543.78. I cannot agree.

Very few Australians are on the minimum wage. Those that are would be hard pressed to rent accommodation in the private market place plus pay for food.

Australia used to have the concept of the basic wage. As originally envisaged, this was meant to be the amount that a family with a single wage earner could live on. Pretty obviously, $543.78 is a long way removed from the concept of a basic wage.

Employers are worried that the increase in the minimum wage will flow on to those higher up the change. This is a legitimate worry. However, it has to be put in perspective.

The gap between the bottom and the top has been widening. If Australia cannot afford to pay its lowest income earners a wage that will allow them to at least survive in minimum comfort, then we have a real social problem.

I would argue that we need to look at a new approach that will allow all Australians to share to some degree in our growth. Without this, we are a pretty poor society.

Reasons for slow posting

I have been struggling to find the time to post. I have therefore decided to draw a line under the past and instead aim to keep up with current posting.

Appeals to Authority and the trap of experience

Over on his blog, Thomas and I have been having a conversation about the value to Australia of a national space program. I am a supporter, Thomas is opposed. I mentioned that I had had an involvement in this area in the past. Thomas accepted that experience, but politely maintained his position.

Thomas was of course right to do so. However, as happens in discussions with Thomas, our conversation took my thinking in a different direction, the problems associated with appeals to authority and the associated trap that can be created by our own experiences.

My mention of my past role in the national space program could be interpreted as an appeal to authority. I have done this, therefore you should listen to me.

At a personal level I am in fact very suspicious of appeals to authority. As soon as x says that I am a scientist or a Government minister, therefore you should listen to me, warning flags go up the mast.

Just because x is a Government minister, a scientist or, for that matter, someone previously involved with the re-establishment of a national space program does not, of itself, make their views valid.

If a Government minister makes an announcement about a new policy, explaining what it is and the reasons why, we can classify this as giving information or opinion. If, as happened sometimes with anti-terrorism legislation, a minister says that we should go along with a change because the Government knew best, then that is an appeal to authority.

Of course we have to take into account experience and knowledge. When Thomas writes about American politics, I read with interest because he knows his stuff. When a scientist speaks about his area of expertise, I listen because he or she is an expert. However, I never accept even expert views in an unqualified fashion. Experts are wrong too often.

Our thinking, writing and actions always draw from our own experience and knowledge. Further, that knowledge is transmuted through the mental constructs that we use to interpret the world or our own fields of knowledge. With time, our experience accretes to our thinking in ever thickening layers like the build up of silt on a delta. The silt can provide fertile crops, but the river itself slows and meanders.

In consulting, we talk about the half life of knowledge as around a year. Consultants mine their own experiences and knowledge in dealing with clients. If they are not adding new knowledge, then they run the risk that the world will have moved on without them.

I frequently refer to my own experiences in writing. Like everybody, I use those experiences to interpret the world. However, I have always to be conscious of the danger that my views may no longer be relevant.

I love history because here I can bring to bear my full range of knowledge and experience in asking questions of and interpreting the evidence. Unlike science where some of the greatest discoveries are made by the young because they have a greater capacity to break out, the writing of history often gains from the silt of experience.

Current events and activities are a different matter. Here we have to decide what experience is still relevant, what must be put aside.

Take public policy and administration as an example. Over the last year or so, I have written about this area a lot, tracing through and interpreting some of the changes that have taken place. I think that I can claim to have a reasonable degree of expertise.

This helps me to interpret and explain. However, it can also be a problem. In dealing with Government systems whether as a consultant, contractor or employee, what is is what matters.

At an operational level, this requires a split personality. All the knowledge of what was, what might be, what should be, has to be put aside because it can interfere with the simple requirement to get a job done. In fact, over ten years ago now I decided to withdraw from consulting to the Government sector because I felt that it had all become just too hard! I wasn't enjoying it.

Drawing this meander to a close, I think that in making and interpreting claims to authority based on experience, it pays to be cautious. Like the old position of engineer on an aircraft, the world may simply have moved on.

Systemic Rigidities in Modern Management 1 - Setting the Scene

In Problems of redundancy and systemic failure I pointed to what I saw as a disconnect between the way organisations were organised and the way people worked. In this post I want to extend my argument using a generalised public sector case study.

Consider a modern public sector organisation.

This has a corporate plan that is meant to describe what the organisation will do over a five year planning period. Each year a business plan is prepared, describing activities over the following twelve months. The individual units within the organisation prepare their own twelve month business plans. There are also a series of published policy statements and strategies setting out approaches and aspirations in particular areas.

The organisation is headed by a CEO. There is a departmental executive that meets regularly to consider policy and operational issues. Each major unit within the organisation has its own executive that also meets regularly to consider policy and operational issues within the unit. Because Departmental activities can cross units, there are a variety of coordinating measures in place, including standing and ad hoc committees as well as standardised consultation procedures.

Activities are monitored and controlled through standardised monthly reporting procedures that measure results against plan. The CEO has a performance based contract with the Government. Very senior staff are also on contract. All staff are meant to have performance agreements that cascade down the hierarchy.

The organisation operates in an area that can be politically sensitive. For that reason, there are a series of rules and procedures governing external contact including the media. These include clearance procedures for every public piece of official paper whether in physical or electronic form.

The organisation manages substantial assets and has a significant revenue stream. A range of measures exist to prevent fraud and ensure probity. The organisation has also adopted project management approaches with a defined cross-organisation methodology.

Apart from its own internal policies and procedures, the organisation operates within a complex web of centrally defined policies, procedures and reporting requirements intended to govern broader public sector activities.

I suspect that this description will sound familiar to many. It all sounds so reasonable. Yet the problem is that the system does not work very well. Part of the reasons for this reflect the unique features of the public sector environment, part are common to all organisations.

In my next post I will look at the public sector features.

Most visited posts

Every so often, I look at the most visited posts to get a guide to visitor interest.

Looking at the most recent list, The Balance of Payments, Australia and the sub-prime crisis had by far the largest number of individual visits. This was followed by Common Management Problems Series 1 - managing up, something that gave me pleasure because this is one of my favourite series.

A little later came Global Demographic Trends - Asia, then The Importance of Demography and Demographic Change - update. Looking at this post reminded me that I needed to update it. But that will happen at another time.

Problems of redundancy and systemic failure

Recently I was listening to a series of reports on failures in some key organisations, public and private. All had a common element, the way that costs had been cut to the point that the organisation lost the capacity to respond to the unexpected. The subsequent costs of failure far exceeded the savings made.

Don't get me wrong. The battle against costs is a constant struggle that must be waged on an on-going basis. But would you want to go onto an aeroplane where systems had been cut to the point that there was no redundancy, where a simple system failure might lead to a catastrophic outcome?

To my mind, our constant pursuit of productivity gains has reached the point where the costs exceed the benefits in many cases. Again don't get me wrong. My professional colleagues and I have generated a lot of fees out of productivity improvement advice. However, there is a question of balance.

Today we live in a world of performance agreements, KPIs, performance based contracts. To a degree, our technology defines us. If you look at those agreements etc, you will find that they are all linear. We have translated computer decision rules into a human environment.

We humans don't work this way. We are often messy, disorganised. We are creative. We have dreams. I sometimes feel that there is no place for humans in the current management environment. We would be better off with robots who just do as they are told.

The modern approach works fine in a straight line environment. It can collapse as soon as a challenge emerges from left of field.

My message. Simply, I suppose, cut your staff some slack.

Deposit bases, credit rationing and the Australian banks

Back in December in The Balance of Payments, Australia and the sub-prime crisis I discussed the reasons why a US financial crisis affected Australian domestic liquidity. Since then, the crisis has eased. However, in so doing it has created another interesting set of dynamics.

Reduced access to international liquidity increases the value of domestic liquidity. Financial institutions that can access that liquidity gain relative to those who cannot. In an Australian context, it is the major banks with their big relatively passive domestic customer deposit bases who are the real winners.

Despite the slowing economy, both households and businesses still need to borrow. With reduced availability of funds, the major banks with their control over deposits begin to ration credit and can also increase interest rates. This allows for reduced risks in combination with increased margins.

Of course, if the economy really slows even the big banks will be affected by the overall reduction in the demand for funds. But at this stage in the cycle, the immediate flow-on effect of the sub-prime crisis is increased bank profitability.

Funding Australia's private schools

Note to readers: I began this post in January, but then got swamped. However, it seemed sensible to finish it despite the passage of time.

Neil has already beaten me to this one, the problems associated with the way the Australian Government funds private schools. However, I thought that I might make a brief comment on the economics involved.

For the benefit of international readers, education is technically a state responsibility. However, over recent decades the Commonwealth Government has assumed greater funding responsibility. Now in the school sector it is the main funder of private education, leaving the states with public education. Herein lies a problem.

In funding private education, the Commonwealth Government uses as a funding benchmark the average cost per pupil in the state system. On the surface, this seems quite reasonable. Yet it is now creating real difficulties.

In recent years there has been a major drift of kids from the state systems to private education. Some parents are now paying up to 50 per cent of their net family income to have their children educated in private schools.

Pretty obviously, many parents believe that there are major problems in the state systems. The reasons for this are complex and beyond the scope of this post. My concern is the impact on the funding of private schools.

As children move out of the state systems, the average cost per pupil in the state systems rises. This happens for two reasons.

First, it reduces the ability of the state systems to capture economies of scale. The state systems still have to provide universal education available to all across large and varied geographic areas with dispersed populations. As children move, they lose some of the advantages offered by network economics, the fact that the cost of teaching an extra child is much lower than the average cost per child.

Secondly, and linked, it leaves the state systems with a greater proportion of higher cost pupils, higher cost schools. Higher cost pupils because problem children who require more attention tend to remain in the state systems. Higher cost schools because the state systems have to maintain schools in areas that the private system will not address because the number of pupils is to small to be economic.

As the average cost per pupil in the state systems rise, so does funding to non-state schools. This extra funding allows private schools to do new things, attracting new students from the state systems. Market disciplines are further reduced, because the proportion of costs covered by fees is further reduced.

In all, it is actually something of a crazy funding model.

Why markets are not always better

Well, it was a longer break than I had intended! Still, a lot has been happening while I was off-line. I have been jotting down notes in my spare time to provide a base for future stories.

I had to laugh today.

Eldest is doing economics at the University of New South Wales. Her latest assignment was to prepare one side in a debate. There were meant to be two of them in the team, but her partner dropped out of the course so she had to go alone.

Why did I laugh? The topic they were given read "the market always gives better results than Government action." Helen had to argue the negative.

How could she not win? Because of the use of the word always, she had only to provide one example to prove her case. The results of the sub-prime collapse are all around us. Of itself, that was sufficient for her to win.

However, while I laughed I was left with a feeling of unease. Irrational exuberance has always been with us. To illustrate her point, Helen gave tulip mania as an example. She could equally as well have taken the south sea bubble.

There have been many crashes. Today, or so it seems to me, we are especially vulnerable because of the sheer size of financial markets relative to physical markets.

Leverage is central to financial markets. If you are making widgets or mining iron ore, then what you do is subject to physical as well as financial constraints. In the financial world, you can leverage transactions far beyond the real value of the underlying assets.

We call this financial engineering. This is a misleading term because it implies a degree of precision, of safety, that is simply not there.

When a small number of institutions operating in a relatively small market by global standards can leverage to the point that they threaten the whole global financial system, then we have a problem.

In Australia where our major financial institutions are generally secure, we still have something of a funding drought because of the flow on effects. This hurts everyone.