“I expect to get valid information … I can’t make good decisions unless I get valid information” George W. Bush, April 13^th 2004.

George Bush’s cry is echoed by every organizational manager in the world. Looking back on the Presidency of George W. Bush we can see many information failures. Every manager would like to be sure that the information received was both timely and accurate. Every good manager knows it’s their responsibility to make sure that information received is timely and accurate. Despite his Yale education, George W. Bush did not learn this. Every good manager knows about the three major barriers to the realization of good information: group think, self-serving subordinates, and uncertainty absorption. Despite his Harvard Business School Education, George W. Bush failed to grasp this. Good managers are proactive to ensure that these barriers are overcome. Despite his years of management experience, George W. Bush did not learn this.

In this article I will deal with the three barriers: first Groupthink, then self serving subordinates, and finally the most subtle of all, uncertainty absorption. I will describe each phenomenon and discuss ways of overcoming them.

Groupthink

The Bay of Pigs, the decision to bomb North Vietnam, and our adventure in Iraq provide us with ample illustrations of Groupthink. This magnificently Orwellian term was coined by psychologist Irving Janis to refer to a group’s inability to tolerate dissent, to a situation in which getting agreement around a solution becomes more important than developing the best solution.

“We have all experienced what the French call “the bottom of the stairs” feeling when one remembers that critical comment that might have changed the course of a discussion. This “last chance” meeting gives us the opportunity to make that comment. It is like those Viking chiefs who used to make their decisions twice over: once when drunk and once when sober. If the two agreed they would carry out the decision; if they differed they would think again.”

Effective managers know that tough action must be taken in order to prevent the domination of the forces of Groupthink. What does Groupthink look like? How would we recognize it in our own decision-making groups? Janis and earlier Norman Maier have identified a number of symptoms that we should be on guard against.

It is often difficult, because of the Groupthink phenomenon, for us to recognize when these symptoms occur in our own groups – after all we know better, we would never make the same mistakes. That illustrates the first and greatest problem: the group believes that it is right; that it is right both factually and morally, and consequently the scenario of the operation (Bay of Pigs, Iraq) will unfold as planned. This sense of invulnerability and moral correctness leads to four things that affect the group as it engages in the process of making a decision. First, there exists a sense of unanimity within the group; everyone agrees on a plan. Indications of this are a failure to generate more than one or two alternative courses of action, and an individual’s unwillingness to express his or her reservations – individuals are their own self-censors. They suppress and keep to themselves their doubts and reservations about the plan. Often, many people share these reservations and the group lacks a true unanimity. In addition, members of the group put subtle pressure on those whose questions slip through the guard of their own self-censoring. As Janis observes they do this by limiting the bounds of criticism to details of the plan rather than to its underlying assumptions and by isolating the dissenter into a slightly ridiculous role as in Lyndon Johnson’s term for Bill Meyers: “Let’s hear what Mr-Stop-the-Bombing has to say”. Finally and most injuriously the group develops the MindGuards. These are the people who filter the information coming to the group. They make sure that outside information is suppressed or reinterpreted if it fails to support the cherished assumptions of the group; a good example was the sidelining of General Shinseki when he suggested that several hundred thousand troops would be required to pacify post-war Iraq. As a result of this process, the group makes its decision only upon information that is supportive of that decision. This builds up a self-fulfilling cycle of correctness. The illusion of rightness and unanimity is preserved; no disruptive questioning or information is admitted by the group.

These processes are pervasive in decision-making groups. One of the few ways of reducing their severity is to institutionalize dissent. Janis and Maier prescribe several mechanisms for doing this. They represent a re-establishment of the traditional American system of checks and balances in the political process.

“Messages are transmitted up organizational hierarchies and each level has its own concerns: folk at the bottom are concerned with operational nitty-gritty issues; those in the middle worry about administrative issues; those at the top are focused on strategic issues.”

A group should routinely make decisions in a two stage process. First, critical evaluation should be suspended and a wide variety of alternative courses of action generated; the final list should consist of the off-beat as well as the obvious. This can be done by having several subgroups or individuals brainstorm lists of alternatives which are then brought back to the policy making group. In addition, group members should be encouraged to discuss the issues with their fellow workers and subordinates so as to bring a wider range of alternatives to the group’s attention.

Second, each alternative should be criticized in terms of its strengths and weaknesses, with equal time given to both aspects. Work should be done on integrating several flawed solutions into a better one. This can be done by the leader of the group formally assigning the responsibilities of criticizing the alternatives to each group member. This alone is not enough; the leader must accept with good grace and an open mind the criticisms made about his ideas and proposals. Without this, all criticism will degenerate to a few pro forma comments. It is also helpful to augment the group, from time to time, with outside members who can bring a wider range of criticisms to bear upon the alternatives under consideration. These criticisms are apt to be less inhibited than those of the group members as they will have not built up any ownership of the alternatives under discussion.

Third, when the group is close to reaching a decision about the best alternative, the leader should appoint a Devil’s Advocate for the two or three options that are under serious consideration. These individuals are to challenge the assumptions and expectations of the proponents of each alternative.

Finally, as a group approaches a final decision, it should be augmented by outsiders who have not been involved in the decision so far. These people will be able to bring to bear a wider variety of perspectives and their comments and criticisms will be less inhibited than those of group members as they will not have built up any ownership of the proposed solution.

At the last step – once a decision has been taken – the group should meet one more time to review doubts and challenge the correctness of the decision. We have all experienced what the French call “the bottom of the stairs” feeling when one remembers that critical comment that might have changed the course of a discussion. This “last chance” meeting gives us the opportunity to make that comment. It is like those Viking chiefs who used to make their decisions twice over: once when drunk and once when sober. If the two agreed they would carry out the decision; if they differed they would think again.

These practices will not completely eliminate errors of judgement, nor will they guarantee success as even the best laid plans may go awry. These procedures will however minimize the chance of failure due to overlooking possible alternatives or failing to consider the potential side-effects of the outcome selected.

Of course, the successful implementation of each of these safeguards depends critically upon the role of the group’s leader. The leader must show that he/she values dissent and should provide a strong role model of the acceptance of critical comment. This means that the group leader should keep an open mind, be open to criticism, and not commit her or himself to a course of action until all the alternatives have been thoroughly explored.

“R&D people are concerned with technical and, to a lesser extent, business issues; Marketing people were more balanced having almost equal concern with business issues, customer needs, selling and technical issues; However, managers in Manufacturing were mainly concerned with production issues and, to a lesser extent, technical. These different foci make it difficult to share insights.”

Self serving subordinates

In organizations, information is power. By holding back information, an individual makes others dependent on him in their decision making processes. In other situations, where there is a major difference in the technical competence between a manager and a subordinate (so the boss is unaware that the wool is being pulled over his eyes, the subordinate can manipulate the flow of information so as to make sure the boss makes decisions that are consistent with the subordinate’s best interests even though they may be sub-optimal for the organization. The classic description of this process was provided by Andrew Pettigrew many years ago in his  graphic description of the power of an information gatekeeper in affecting the outcome of a strategic organizational decision (to make a major computer purchase). By carefully controlling the flow of information between a set of suppliers and the decision  making body (the Company’s Board of Directors), the gatekeeper ensured that ‘his’ supplier received the contract for the purchase.  The gatekeeper used the following tactics:

a) Providing fulsome and timely replies to communications from the supplier that he favored, but only reluctant and tardy replies to communications from other suppliers.

b) Refusing to visit or be “wined and dined” by the other suppliers.

c) Refusing to let his subordinate managers (each of whom  favored a different supplier based upon their departmental interests; this was after all a multi-party political game) have direct access to the deliberations of the decision making body.  The only exception to this was on an occasion when he knew that the most influential board member would be absent.

d) Providing a biased balance of positive and negative information about ‘his’ supplier and the other suppliers to the decision making body.  He did this by diagnosing the ‘assessed stature’ (how good it looked in the eyes of the Board) of his department with the decision  making body; he then passed information that he wanted to be believed when his stature was high (positive information about ‘his’ supplier, negative information about other suppliers), and he passed information that he wanted to be ignored or discounted (negative information about ‘his’ supplier, positive information about the others) when his department’s stature was low. Note that over the whole decision period he provided balanced positive and negative information about each supplier. The imbalance lay in his strategic shifting of the balance of positive and negative information depending on how his bosses perceived him.

How can managers prevent being manipulated in this way? The first shield against this kind of manipulation is by being as technically well informed as the subordinate. This enables the manager to undertake his own evaluation of the adequacy of the information. However, this shield is rarely available in this world where problems are multifaceted and it is impossible for the manager to be an expert in each facet. The second, more proactive, technique is for the boss to reach down the hierarchy to gain information directly from the subordinate’s own subordinates (and the suppliers) rather than having it filtered through the bottleneck of the subordinate’s filtering mechanisms.

Further distortion by self-aggrandizing subordinates is the suppression of bad news or the inflation of good news. This tendency is increased when several subordinates are in competition for the support of the boss and when, as in this case, the boss has the power to decide the fate of those subordinates (in terms of budgetary outcomes). This is what appears to have happened in the famous August 6, 2001 Presidential Daily Briefing document. The FBI claimed that they were engaged in seventy “full field” investigations of terror suspects. In fact they were merely passively monitoring the suspects’ financial affairs rather than their quotidian activities (like learning to fly). Again, a vigilant manager would look beyond the label “full field” and ask what exactly was being done, to whom, and why, and where. Tough questioning might have revealed how sham these “full field” investigations were with a consequent increase in surveillance of the suspects. Other things that can be done to minimize this tendency to inflate good news and suppress bad news is through the development of trust between the parties – the boss and each of the subordinates with each other.

Uncertainty Absorption

The third prevalent source of information distortion in organizational communication is uncertainty absorption. This occurs where raw data are summarized, aggregated, and edited prior to being transmitted onward.  Two processes seem to be involved: the selection of data from the plethora of incoming stimuli; and the packaging of this data for transmission.  In both processes, the monitor/communicator’s frame of reference or cognitive map is crucial in determining what information will be noticed and what information will be transmitted. In either process, information can either be suppressed, attenuated or enhanced.

It is clear that organizational position (functional specialty, staff/line, hierarchical level) affects the frame of reference that individuals use to scan their environments and incoming communication messages. These differences are found both in terms of the aspects of the environment attended to and in terms of the complexity of the individual’s cognitive map. For example, higher level managers in both staff and line functions had higher cognitive complexity than those managers at lower levels; however, high level staff managers were less complex (more single tracked) than their line counterparts.

The problem is that information congruent with a particular frame of reference is more easily noted or transmitted.  When people with different frames of reference communicate, the receiver will distort the incoming information to fit her/his frame of reference.  In organizations,  different departments have different “funds of knowledge” and different “frames of reference.” For example, R&D people are concerned with technical and, to a lesser extent, business issues; Marketing people were more balanced having almost equal concern with business issues, customer needs, selling and technical issues; However, managers in Manufacturing were mainly concerned with production issues and, to a lesser extent, technical. These different foci make it difficult to share insights. Deborah Dougherty found that successful product development only occurred when firms broke out of these habituated ways of thinking. Successful innovation resulted in someone, somehow ensuring that multiple frames of reference were considered. Only when issues and solutions were considered in these varieties of ways was success ensured.

Similarly, messages are transmitted up organizational hierarchies and each level has its own concerns: folk at the bottom are concerned with operational nitty-gritty issues; those in the middle worry about administrative issues; those at the top are focused on strategic issues. Thus information selected at the bottom for its operational relevance may be useless from a strategic perspective – especially after the middle managers have put their “administrative” spin on it. Furthermore, information that is relevant from a strategic perspective may never be noticed because it is irrelevant for operational purposes. The enhancing of information for strategic purposes is demonstrated by the use made by Britain’s Joint Intelligence Committee in the run up to the Iraq war. In that case, an unsupported piece of information – that Hussein could deploy WMD at 45 minutes notice – was bolstered to become a major plank in the British Government’s case for going to war. Chapter 6 of the Hutton report describes the process nicely.

Uncertainty absorption is probably the most difficult for the organization, especially a large differentiated organization, to solve. It involves people in different divisions and at different levels taking the time and energy to understand the mindsets of people in different positions in the organization. Presidents need to talk to operatives, marketers to researchers, and, in government, everyone needs to understand the political implications of what they do.

For each of these barriers to effective communication, Presidents and top managers need to be proactive. They need to actively explore frames of reference, they need to challenge the assumptions underlying the options that are proposed to them, and they need to get opinions from all parties affected by the decisions they make.

Image provided courtesy of: http://www.flickr.com/photos/deapeajay/1928521563/

Martin G Evans is Professor Emeritus of Organizational Behaviour at Rotman School of Management, University of Toronto

The collapse of a global housing bubble has caused chaos in the mortgage sector. David Steven warns that unless bold action is taken by whoever forms the next Government, there could be considerable pain ahead.

I don’t envy whoever wins the next general election, it seems no coincidence that both main parties appear to be doing their best to lose. Whoever forms the new government will take office in the midst of the worst global financial crisis since the 1930s. Financial crises of this scale generally take a long time to work their way through the system.

“The FSA admits that its “assumption about firms managing…credit risk responsibly has been shown to be wrong in many cases.” In other words, the market failed, as lenders relaxed standards in their eagerness to shovel money out the door.”

On average, post-WW2 banking crises have been followed by a 35 per cent decline in house and a 56 per cent decline in equity prices, a 7 per cent point increase in unemployment, and a 9 per cent decline in real per capita GDP. Government debt has increased by 86 per cent, leading to a corresponding rise in sovereign risk. The pain is usually spread over many years.

For most of the next electoral cycle – and possibly for longer than that – governing is not going to be fun.

For the UK, if I had to predict where trouble will come from, I’d look to the housing market – which remains much beloved by politicians from both major parties. Gordon Brown has argued that Margaret Thatcher’s government did not go far enough in persuading people to buy, not rent, houses. “The problem is that even with the great ambitions of the 1950s or the 1980s,” he says, “they did not succeed in widening the scope for home ownership to large numbers of people who want it.”

David Cameron has promised to “create a whole new generation of homeowners” and to “extend massively the whole housing market.” That is going to be tough in a country where almost 70 per cent of households are owner-occupied.

At the moment, the housing market is surprisingly buoyant. According to the FT House Price Index, prices are climbing once again and are now only 7 per cent below their peak in 2007. Many pundits think that’s good news. Unfortunately, there’s a strong chance that the market’s buoyancy will prove short-lived and that the housing bubble is still far from deflated.

“So how does the FSA think we should respond to these deep-seated failures? We have heard lots of bold talk from it recently, with its chairman, Adair Turner, promising “to challenge our entire past philosophy of regulation.” Its review, sadly, fails to live up to this rhetoric, serving up proposals that are about as radical as the Antiques Roadshow.”

Like all bubbles, the boom has been funded by debt. Disposable income has risen relatively slowly since 1979 – but house prices have shot up. By and large borrowing has filled the gap. Over the next decade, British families will have a mountain of liabilities to pay off. Collectively, we now owe around $1.25 trillion on our mortgages.

The intergenerational impact of this period of excess is striking. According to Spencer Dale, the Bank of England’s Chief Economist:

“The money borrowed by young families ended up in the bank accounts of older households…The increase in house prices over the decade to 2007 – and the massive financial flows associated with that appreciation – represent a huge redistribution of wealth between different households in our society.”

It is hard to think of a bigger redistribution in British history – or a more regressive one.

At the moment, the hangover from the boom is only beginning to be felt. Most borrowers are still above water (prices are only down 7 per cent, after all). They can also afford their repayments. The ‘great moderation’ was a period of low interest rates, as cheap money sloshed around the system, pumped into the UK from overseas. The long decline in base rates mirrors the equally steep rise in house prices.

Sorting out the froth in the market from fundamentals is a thankless task, but back in 2006 when he predicted the coming crash, David Miles estimated that around half of price rises could be ascribed to the hope of speculative gains, with unusually low real interest rates also playing an important role. In other words, cheap money enabled people to gamble on a continued upward trend in prices. As in a Ponzi scheme, everyone ‘felt’ richer as long as the market kept moving.

The reaction to the crash has been to cut nominal rates further – making repayments much cheaper than they were before the financial shock. Most borrowers are yet to feel much of a ‘shock’ because the government’s injection of funding has sharply reduced their outgoings when compared to the latter phases of the boom.

The market is, however, highly vulnerable to any spike in interest rates. In time, new liquidity rules will increase the cost of all lending, mortgages included. Recovery relies on the world’s exporters not running such big surpluses, which should bring the era of cheap money to an end. And who knows what the UK’s parlous public finances and sterling’s decline will do for the long-term inflationary outlook?

In the short term, at least, not much can be done about the systemic risk that this leverage brings. If the housing market weakens again – which I think it will – we can only hope that it stagnates, rather than dramatically collapsing. That, at least, would spread the pain over ten years or so.

But the new government will have a brief window in which it can ask fundamental questions about what went wrong. Why has the UK housing market experienced two bubbles in a generation? Why does it cost so much to buy a house? And what role has mortgage finance played in driving up prices?

A starting point for this analysis should be the FSA’s recent Mortgage Market Review. The review does not make for comfortable reading. The FSA admits that its “assumption about firms managing…credit risk responsibly has been shown to be wrong in many cases.” In other words, the market failed, as lenders relaxed standards in their eagerness to shovel money out the door.

Some lending was out and out predatory, with the FSA fingering lenders who “entered the market with the expectation that a large number of their consumers would not be able to pay and would have to mortgage or face repossession.”

So how does the FSA think we should respond to these deep-seated failures? We have heard lots of bold talk from it recently, with its chairman, Adair Turner, promising “to challenge our entire past philosophy of regulation.” Its review, sadly, fails to live up to this rhetoric, serving up proposals that are about as radical as the Antiques Roadshow.

“Research shows MBA students struggle to compare loans with just three variables: term, monthly payment, and APR. Throw in charges, penalties, stepped interest rates, temporary fixed rates, and the unknowable future cost of refinancing – and the vast majority of borrowers have no chance of making an informed choice on their mortgage.”

The FSA’s most striking failing it that does not set out any systematic analysis of the risks lurking in the market, despite its repeated calls for others to ‘stress test’ their business models. As a minimum, I’d like to know the number of borrowers whose mortgages would:

-       Become unaffordable for each percentage point increase in interest rates.

-       Become unaffordable for each percentage point increase in unemployment.

-       Or who would fall into negative equity for each percentage point fall in house prices.

Having robust data on these three indicators would provide a much better yardstick for assessing risk and resilience in the market. Without them, it’s hard to see how the FSA can even begin to plot a future course.

The review also fails to even ask hard questions about why the UK’s mortgage market is dominated by short-term deals, most of them deliberately engineered to play on our tendency to overvalue immediate benefits and forget about long-term costs.

Financial institutions may forget their behavioural finance when making their own mistakes with shareholder money, but they are adept at framing the choices they offer to members of the public. They also know how useful complexity is. Research shows MBA students struggle to compare loans with just three variables: term, monthly payment, and APR. Throw in charges, penalties, stepped interest rates, temporary fixed rates, and the unknowable future cost of refinancing – and the vast majority of borrowers have no chance of making an informed choice on their mortgage.

Systemically, the risks are multiplied by the fact that most borrowers are either on variable rates or are within a year or two of needing to refinance. The long-term fixed-rate mortgage is still only rarely spotted in the UK.

The FSA ignores all this, failing to explore the fundamental problem of how to develop a mortgage market aligned to long-term social needs and that is resilient across a range of economic conditions. Instead, it serves up a lukewarm mish-mash of a proposal, including a ban on mortgages to customers with a ‘toxic mix’ of risk factors and a time-consuming affordability test for all borrowers.

The former proposal, while worthy, merely bolts the stable door on the last crisis. The latter will undoubtedly be gamed by lenders: as the application process becomes more onerous, borrowers are likely to compare fewer products.

In my report for the Long Finance Foundation, I set out two quite different regulatory visions for a more resilient mortgage market. I call the first ‘edited choice’. The second ‘melting the glue’.

Edited Choice increases resilience by:

-       Seizing the frame from lenders, and framing borrowers’ decisions in a way that is intended to make the market robust over the quarter century it takes to pay back a typical mortgage.

-        Levelling the playing field between borrower and lender, by making it much easier to compare choices across a menu of options, providing borrowers with new choices (longer term mortgages, interest rate caps, etc.) even while complexity is reduced.

-       Increasing buffers and diversity in the system by creating a better spread of borrowers across fixed rate and variable rate mortgages, while substantially reducing borrower vulnerability, especially to interest rate volatility.

It includes the following elements:

-       Standardised process for affordability and credit testing.

-       Limited product range, providing easy cost comparisons.

-       All variable mortgages pegged to BoE interest rate.

-       No short-term mortgages – lifetime trackers and fixed rate products of 5, 10 and 25 years.

-       New choices, such as the ability to hedge exposure to interest rate rises.

-       Application fees and set up costs rolled into mortgage.

-       Standard menu of late-payment penalties.

Under this option, lenders are not being forced to offer products at a specified price, but rather to ensure their products conform to a series of clear benchmarks that allow for easy price comparison, achievable through a streamlined mortgage process. Mortgage finance is treated as a service and lenders as ‘service providers’ who ‘tender’ to provide that service at the best possible price.

“The FSA’s big failing is that it takes the status quo as a starting point and then jerry-rigs a few half-hearted reforms on top of that. The next government will need to be much bolder, if it is not to face its own housing crisis. The one positive benefit of a financial crisis on the scale we have just seen is that it should open up space for radical thinking.’

It is, without doubt, a coercive regime, but, in balance, it does not inhibit competition. Indeed, its primary feature is to restore the ability of buyers to compare what they are being offered by sellers, the basis on which true competition rests. This option could easily be implemented by any government with the political will to counter objections from the industry.

By contrast, Melting the Glue increases resilience by:

-       Creating greater diversity in provision, diluting the control exerted by traditional lenders, strengthening the hand of trusted navigators, and catalysing a new generation of mutuality.

-       Using diversity to increase choice, while empowering social networks to help edit that choice for borrowers, and increase accountability for lenders.

-       Making it clear that lenders and borrowers are responsible for reducing their own vulnerability, while reserving the right to take tough action against the former, and helping ensuring the latter have the support they need.

It aims to create resilience from the ground up. At present, the government is guilty of ‘fig leaf’ regulation, appearing to protect consumers from risk, while not successfully doing so. Perhaps then, it should reduce its direct involvement in the market, but only after a period of transition during which it would reintroduce diversity into what is currently a bland, and uncompetitive, monoculture.

The ‘melting of the glue’ highlights the main regulatory task, which is to break the current bonds in the market. Key steps include:

-       The compulsory release of information to create more robust basis for product comparison.

-       Investment in civil society organisations to strengthen social networks around borrowers, enabling them to act as intermediaries helping borrowers to make more informed decisions.

-       Unwinding the government’s ownership position in the financial industry to create a new generation of mutual institutions, repairing the damage done by the demutualisation of the 1990s.

-       Establishment of a more distant relationship between government and financial services industry, with the regulator eventually limiting itself to a role that mostly involved tough action to limit and break monopolies, while ensuring borrowers had legal liability for mis-selling.

This regime would be much less controlled. Instead, it would place greater onus on borrowers to protect their own interests, boosting the role of intermediaries who can act on their behalf. Implementing this option would require considerable skill. The government would have to trust its own ability to act as a catalyst, harnessing broader social forces to the task of making mortgages work.

The options – which are laid out in much more detail in the full report – are poles apart, and deliberately so. The FSA’s big failing is that it takes the status quo as a starting point and then jerry-rigs a few half-hearted reforms on top of that. The next government will need to be much bolder, if it is not to face its own housing crisis. The one positive benefit of a financial crisis on the scale we have just seen is that it should open up space for radical thinking.

It is vital that we all realise that there are real choices about how we recover from the trouble the property bubble has left us in. My thoughts here are an attempt to inject some new thinking into the debate.

This article was based on a talk given at a Long Finance Foundation roundtable at Gresham College on 2 March.

David Steven is a Non-Resident Fellow at New York University’s Center on International Cooperation, where he works in risk and resilience. He is a director at the consultancy, River Path Associates, and a member of the advisory board for JLT’s World Risk Review. Recent publications include Confronting the Long Crisis of Globalization – a Risk Doctrine for a Resilient International Order for the Brookings Institution and Risks and Resilience in the New Global Era for the journal, Renewal. He is the co-editor with Alex Evans of Global Dashboard (www.globaldashboard.org), the global risk and international affairs website.

Image supplied courtesy of: http://www.flickr.com/photos/vkreay/478417739/

Social outsourcing – which we might alternatively term “developmental outsourcing” – means the targetting of outsourcing contracts to poor communities in developing countries; with an explicit aim of poverty alleviation and achievement of other socio-economic development objectives.  Client organisations could contract this work direct to producers in those communities.  Much more often, though, they work through a new breed of intermediary organisations set up to facilitate social outsourcing.  The intermediaries negotiate and fufill their clients’ contracts, managing all communication with the developing country workers who may either be intermediary employees, or have set up their own micro-enterprise.

“The whole situation is reminiscent of that facing the new – as it then was – IT offshoring model 20-years ago.  The money side always made sense.  The key roadblock was client trust that this novel and relatively untried approach could deliver.”

Examples are constantly emerging in this field, but – focusing just on the social outsourcing of IT contracts – we can identify different manifestations.  Most take place between clients and contractors based in the same developing country.

“Government social outsourcing” involves the decision of public sector organisations to outsource IT services work to local social enterprises.  As discussed in more detail below, India’s Kerala State government has led the way here as part of its “Kudumbashree” initiative that outsources data entry and IT training work to women’s cooperatives.  “Rural social outsourcing” sub-contracts work – often business process outsourcing – from large urban businesses to micro and small enterprises in rural areas.  Again in India, DesiCrew is an intermediary that has solicited digitisation work from large firms in Chennai, and fulfilled those contracts using villagers based around rural telecentres in other parts of Tamil Nadu state.  “Urban social outsourcing” works similarly, except that sub-contractor employees are drawn from city slums – Datamation Foundation has used a number of large data entry contracts to work in this manner with unemployed migrants in Bangalore.

The final form of social outsourcing is “IT fair trade”, bringing an international dimension by offshoring IT work from industrialised countries to developing countries and incorporating a stated developmental intention.  The largest actor in this market is believed to be Digital Divide Data (DDD), based in New York, which outsources data entry and other digitisation work from US clients to employees in Cambodia and Laos.

At present, the market size is fairly limited.  Datamation Foundation and DesiCrew each work with 100 or so employees; Samasource – another IT fair trade intermediary – and DDD work with 500 and 650 staff respectively.  But growth rates have been high: DDD’s revenue was US$2.2m in 2009, up 50% from the previous year.

“But building along the trust curve to this level of activity has been hard-won: Kerala government agencies were so suspicious at first, so sceptical of the idea that women from poor communities could do IT work, that SPEM staff were forced to take the exceptional step of putting their own pay cheques up as contract guarantees.”

Behind such growth rates lies the recognition of clients that they may gain benefits from social outsourcing beyond those found in standard commercial outsourcing.  Some, for example, see this type of work as helping achieve their corporate social responsibility (CSR) agenda.  The value then depends on the perceived purpose of CSR which could be anything from a moral purpose, to a desire for image-building or the deflection of political criticism.  On this last point, IT fair trade intermediaries based in the US see social outsourcing as a way to address some of the antagonism expressed towards offshoring.

Perhaps far from the CSR agenda but still contentious, clients can achieve financial savings when they outsource to poor sub-contractors with a very low cost base.  Of course, social outsourcing has to include the cost of the intermediary organisation.  Nonetheless, there exists significant potential for savings between, say, a US minimum wage of US$7.25 per hour and a developing country poverty threshold crossed when income rises above US$1.00 per day.  Even comparing commercial and social outsourcing within a developing country, the financials can easily make sense: a number of data entry contracts within Kerala’s Kudumbashree project were bid on a competitive basis – the women’s cooperatives always won because they so greatly undercut the rival bids from existing commercial firms.  In one early tender – for digitisation of savings fund data – the cooperatives’ bid was just US$10,000 compared to US$30-40,000 from competitors.

The whole situation is reminiscent of that facing the new – as it then was – IT offshoring model 20-years ago.  The money side always made sense.  The key roadblock was client trust that this novel and relatively untried approach could deliver.  In a similar way, social outsourcers are finding themselves moving slowly up a trust curve with each new client, as they demonstrate that they can deliver on time and on quality.  This explains why the intermediary model has come to dominate – the intermediary buffers the client from having to deal directly with employees from poor communities, takes care of issues such as quality control, and provides a brand name that can accrue reputational capital.  At least they are saved one of the problems faced in many commercial outsourcing contracts: staff turnover is very low as the labour market in poor communities provides few opportunities or incentives for “job-hopping”.

If that explains some of the picture from a client perspective, what about the sub-contractor perspective: what development impacts is social outsourcing actually having?  Recent work undertaken by the Centre for Development Informatics, and funded by the UK’s Department for International Development, sought to answer this question.  In partnership with research consultants, PlanetKerala, CDI undertook a full field-based impact analysis of the IT social outsourcing component within the aforementioned Kudumbashree initiative.

Kudumbashree helps groups of ten unemployed women from below-poverty-line families come together to form a cooperative micro-enterprise, using a mix of a very small amount of their own capital, a government grant and a matching bank loan.  The initiative covers areas such as street cleaning, food preparation, and school uniform manufacture.  But just over 230 of the cooperatives work only on IT: computer skills training, data entry and digitisation, and PC assembly and maintenance.

As noted above, some of the IT social outsourcing contracts were won in response to public tender.  In other cases – thanks to a government ruling – some public agencies have permission to tender direct to the Kudumbashree project; because of its combination of low cost and social purpose.  Whatever the contract route, such matters are always handled by an intermediary organisation; in this case a small team of staff based within the State Poverty Eradication Mission (SPEM).  That team acts as broker between the public sector client organisations and the women’s sub-contractor enterprise (or enterprises where the team puts together a consortium bid).  One overall estimate was that 70% of outsourced IT contracts in local government were being won by the women’s enterprises.  But building along the trust curve to this level of activity has been hard-won: Kerala government agencies were so suspicious at first, so sceptical of the idea that women from poor communities could do IT work, that SPEM staff were forced to take the exceptional step of putting their own pay cheques up as contract guarantees.  Such stories are common among those seeking to get a foot in the door for social outsourcing with new clients.

“Stepping further back, we must recognise that this business model may fall foul of the standard criticism of fair trade.  By seeking to go “beyond the market”, IT social outsourcing runs the risk of creating something that flies in the face of sound economics; something which is unsustainable and dependent on the client’s whims.”

What, then, of the developmental impact of IT social outsourcing?  In the Kudumbashree case – likely the largest individual example of applying this business model – around 2,500 new jobs have been created.  Almost all are for previously-unemployed women; though some 200 are men hired as additional labour by the women’s social enterprises.  Those jobs have created incomes.  Such incomes are not great – they average just US$45 per month, but this means that around 80% of the individual women had been pulled above the one-dollar-per-day poverty line.

The women mainly used their new income for everyday expenditures: food, utilities, clothing, transport to work, and the like.  However, in terms of the reported value of expenditure, they identified other items – either economic investments like debt repayments and housing improvements, or social investments like spending on healthcare, education and marriage.

Kerala is unusual in the high level of education of the populus, and many of those involved had completed secondary school, or even taken college degrees.  Nonetheless, involvement with IT social outsourcing had provided a fairly-obvious gain of IT-related skills; some up to the level of hardware assembly and repair, and software programming.  Because of their collective involvement in running their enterprises, the women could also demonstrate they had gained administrative and managerial skills and even, in some cases, entrepreneurial skills.

Finally, and most striking when visiting these enterprises, was the growth in self-confidence these women experienced.  We conducted more than 150 interviews, and every single woman asserted that her confidence had improved with examples seen in tackling problems, in approaching institutions, in dealing with other people, and in travelling more widely.  Two-thirds said they felt greater respect, recognition and acceptance in their families and their communities – not simply because of having a job but because of having an IT-related job: something associated with modernity and progress.  As a result, for example, community members would approach them with queries about IT or about setting up an IT enterprise.

Of course, we did find some less positive data.  Some enterprises had cashflow problems, due to the government’s poor payment record.  A very small number of enterprises were badly-managed and struggling to survive.  And some dogs did not bark: in terms of gender relations, the impact was less than transformative with a continuing degree of deference to fathers or husbands as ultimate decision makers.

Stepping further back, we must recognise that this business model may fall foul of the standard criticism of fair trade.  By seeking to go “beyond the market”, IT social outsourcing runs the risk of creating something that flies in the face of sound economics; something which is unsustainable and dependent on the client’s whims.

That concern about sustainability is something that bothers a number of social outsourcing intermediaries.  As a result, they have created a model in which their role in any individual’s life is only temporary.  Datamation Foundation, for instance, works this way.  It identifies unemployed migrants in Bangalore poorest neighbourhoods, trains them and then gives them work through social outsourcing contracts for a certain period of time – perhaps one year, perhaps two.  Towards the end of that period, the individual – like the women in the Kudumbashree project – has the financial capital, the skills and the confidence to move on to a better-paid job in one of the thousands of IT-enabled services firms in and around the city.  Datamation see this as a providing a ladder that reaches from the joblessness in the urban slums at one end to a middle-class career at the other.

Whatever the specific model, and despite the undoubted challenges it will face, it seems likely that social outsourcing is set to grow.  We still know too little about many aspects such as client motivations, intermediary best practices, sub-contractor sustainability, and the increasingly fuzzy edge between the developmental and the commercial.  But we hope to track these and other issues through future research on IT social outsourcing within the Centre for Development Informatics.

Further Reading

Heeks, R.B. & Arun, S. (forthcoming) Social outsourcing as a development tool: the impact of outsourcing IT services to women’s social enterprises in Kerala, Journal of International Development

Image provided courtesy of: http://www.flickr.com/photos/articnomad/16153058/

For more information on the centre for development informatics visit:

http://www.sed.manchester.ac.uk/research/cdi/

Helen Green suffered a nervous breakdown as a result of “abnormal stress”. She was 36 and a company secretary for Deutsche Bank in London. A gang of four women, who continually made offensive and mocking remarks about her being illegitimate, Jewish and an orphan, caused the damage, making her working life a misery.

“Control freaks adopt an authoritative style to micro manage people and leave no room for their colleagues to manoeuvre. In short these people epitomise the MY WAY OR THE HIGHWAY syndrome. Perfectionists set high standards for insignificant details and demand perfectionism by finding faults and nitpicking.”

In a tough, uncompromising working environment Helen was no shrinking violet. She played hockey to county level and skydived with people from the army. But after years of bullying in the bank, she was awarded £800,000 compensation in 2006 after it was revealed that work colleagues liked to boast when they nearly made her cry in what was described as an environment of “extreme bitchiness”.

This is just one example of how toxic behaviour can financially damage companies, as well as hurt their reputation dearly. Toxic behaviour is defined as “any behaviour that causes harm, damages relationships or generates persistent, adverse feelings in other people”. Studies indicate that toxic behaviour is on the rise, both in society and in the workplace. The effects, as shown above, can be devastating to both individuals and businesses. In 2008, the Health and Safety Executive (HSE) reported that in the previous year the number of workers who sought medical advice for work related stress increased by over 110,000. Work related stress, anxiety and depression (just some of the symptoms of toxic behaviour) caused the loss of 14 million working days. The same report estimates that one in six workers suffer from work related stress and warned that the figures for the next few years will show a further increase. Other common symptoms of toxic behaviour are high staff turnover, absenteeism, sickness, lateness, high levels of stress, grievances, disciplinary action, burnout, early retirement, customer complaints about quality, constant reorganisation, poor management and physical damage both to people and property.

More than likely, most readers will correctly associate bullying as a form of toxic behaviour. There are of course, different styles of bullying, all of which can have equally damaging consequences. Probably the two best-known manifestations would be intimidation and aggression. These styles occur not only in young children in the playground but also all the way up to senior management in the boardroom. But two other styles also exist, more frequently in the workplace. “Control freakery” and “perfectionism”. At first glance these seem less harmful, but the effects can be just as devastating as intimidation and aggression. Control freaks adopt an authoritative style to micro manage people and leave no room for their colleagues to manoeuvre. In short these people epitomise the MY WAY OR THE HIGHWAY syndrome. Perfectionists set high standards for insignificant details and demand perfectionism by finding faults and nitpicking. These two forms of bullying often go unnoticed in most organisations.

Manipulation is another form of bullying which can cause the same toxicity in the organisation. Many organisations and individuals do not realise this subtle form of bullying. Victims of this method of bullying generally do not realise immediately what is happening but on reflection suffer the same consequences of outward bullying. Like its cousin bullying, manipulation manifests in four forms: ”Equivocation, Flippancy, Dissimulation and Toadyism”.

The first two styles are predominantly adopted by people seen to be successful. They love to be the centre of attention and would use duplicitous behaviour or sarcastic humour to get what they want. They attempt to charm people or play the emotional note to manipulate people. Dissimulators use democracy as a tool to manipulate people by insisting on obtaining a consensus, whereas in reality they are incapable of taking a decision and use democracy to mask that. Toadyism aka bootlicking is more visible as they shamelessly praise people even for trivial things, massage their ego and get what they want. They are adept at playing the emotional card and can sap organisations’ energy shamelessly for personal gains. Watch out for the manipulators as they are equally toxic.

In business toxic behaviours results in declining performance, high staff turnover, absenteeism, sickness, increases in stress, grievances, disciplinary actions, early retirement and burnout. In individuals it generates feelings of inadequacy, low self-esteem, anxiety, anger, frustration, guilt, fear and hopelessness. All of which tend to trigger ongoing health problems. Toxic communication can be very difficult to detect.

The Andrea Adams Trust (the first charity in the world dedicated to tackling workplace bullying) reported that one in four people are bullied in the workplace. Their report went on to suggest that 43.5 per cent of employers do not have a policy to deal with workplace bullying and yet 93.1 per cent of all personnel practitioners (questioned) say that bullying is occurring in their own organisations. Although no specific conclusions were drawn, the report did indicate that 82.2 per cent of those practitioners questioned also suggested that weaknesses in management were the prime reason for bullying. Poor communication skills displayed my managers aggravates toxic situations.

The impact of toxic behaviour is huge as it can upset the effectiveness and efficiency of the workforce. If employees are bullied constantly at work, their survival instinct kicks in which could be catastrophic for the individual as well the organisation. The increased stress levels can result in erratic behaviour involving wrong decisions, costing a fortune to the organisation and eventually resulting in a reduction in head count. Power play on the other hand has similar effects but on a grander scale. Toxic behaviour of two power players can lead to loss of talent which could have been retained otherwise.

“An individual who is very delivery focussed, very detail oriented in executing a plan and very pursuant in pushing a team to deliver can be wrongly categorised as an intimidator or  aggressive. If the individual gets an opportunity to understand or visualise how his/her actions can be perceived it would help them to alter their behaviour or in extreme cases communicate with the other parties to explain why they are not toxic.”

There is a legal angle that organisations need to consider when they choose to ignore toxic behaviour. In a recent judgement Abbey had to award close to £2 Million to an investment banker as he was bullied at work in the UK. When there are emotional scars that run deep it stunts their confidence and paralyses the individual’s ability to perform better. In addition to a huge payout the organisation deters talented people because of the negative publicity that is associated with it.

Ignorance of the law is not acceptable and cases brought by employees can have damaging consequences: financial loss, loss of reputation and termination of trading licenses. Even criminal charges can be initiated. Its only when the behaviours of individuals is extremely polarised they tend to become more toxic.  Any extreme form of behaviour can become toxic.

In addition to the toxic behaviours there are pseudo toxic behaviours that can have a detrimental effect on the organisation. However, every form of toxic behaviour has a balancing positive nourishing behaviour. In most of the cases individuals could be perceived as toxic whereas in reality they are not and in most cases these individuals are not even aware of the consequences of their actions or inactions.

The human brain has an amazing ability to learn and link multiple levels of abstract information to reach a logical conclusion. However, this innate ability also becomes the Achilles heel when it comes to understanding people. An individual who is very delivery focussed, very detail oriented in executing a plan and very pursuant in pushing a team to deliver can be wrongly categorised as an intimidator or  aggressive. If the individual gets an opportunity to understand or visualise how his/her actions can be perceived it would help them to alter their behaviour or in extreme cases communicate with the other parties to explain why they are not toxic.

We now know the detrimental effects of toxic behaviour on business and individuals. To avoid unanticipated and unexpected business problems resulting from toxic behaviour organisations are advised to undertake regular toxic health checks. People have annual health checks. They have their cars serviced annually. Businesses have equipment serviced annually. In a society that is increasingly shifting towards a model of prevention rather than cure and early diagnosis over surgery, shouldn’t organisations also go through a routine health check? It can very easily be detected using the proper diagnostic tools by performing a TOXIC health check.

In some cases this can show that rather than a culture of genuine toxic behaviour taking root in an organisation the cause of stress is often the perception of others’ actions. In one recent example the director of a bank subjected the entire team to a toxic evaluation check as a result of senior managers appearing visibly stressed. The findings showed that it was the perception of others behaviour causing the stress. The team was subsequently encouraged to communicate more openly, explain their actions and taught how to adopt their behaviour to balance workplace toxicity.

Pain is part of organisational life. Pain by itself isn’t toxic. The way pain is handled (harmful Vs healing way) over a period of time results in emotional toxicity. Toxicity in the workplace appears through leadership, culture or managers. Toxicity is the pain that strips people of their self esteem and that disconnects them from their work in the workplace. A toxic health check can help spot early signs of stress.  The organisation can then effectively deal with it to build a healthy environment which nurtures, nourishes and celebrates talent and uses it effectively to achieve its objectives.

Dr Ram Raghavan is the managing director of Talengene (www.talengene.com) – a company that helps organisations spot and replicate successful patterns in behaviour and strategy to enhance profitability and effectiveness.

Image supplied courtesy of: http://www.flickr.com/photos/beatkueng/3946518449/

Global outsourcing of IT and other business services is an established business practice.  However, many organizations today are increasing their expectations regarding corporate social and environmental sustainability. The importance of this issue is reflected in our interviews with executives in the area and a quick count of articles in The Sloan Management Review reveals 26 recently published papers focusing on sustainability.  Clearly, this issue will become increasingly important in global outsourcing scenarios where companies collaborate across internal and external boundaries.  Research undertaken at MBS has focused on understanding the current and potential impact of social and environmental sustainability on global IT outsourcing. Environmental sustainability issues impact global outsourcing as energy becomes more costly and sustainability becomes a more important theme for business.  Global outsourcing can be controversial due to job losses and evokes strong public and government reactions which we deal with under the banner of social sustainability.  Dealing first with the environmental issue, two issues have driven environmental concerns in IT outsourcing related to increasing power consumption.  Many outsource providers are major consumers of electrical power and the cost of energy is now a major concern for all organizations.  The 2009 Green Outsourcing Survey states that “the adoption of green technology is more likely the result of escalating energy costs than ecological altruism”.  Alongside rising energy costs, there is an unrelenting appetite for energy in data centres. The European Commission Institute for Energy has recognized the problem of growing data centre energy consumption.  The Code of Conduct on Data Centres Energy Efficiency recognizes that “projected energy consumption rise poses a problem for EU energy and environmental policies. It is important that the energy efficiency of data centres is maximized to ensure the carbon emissions and other impacts such as strain on infrastructure associated with increases in energy consumption are mitigated.”

“Global outsourcing critics posit that Global IT Outsourcing presents the potential for unfettered and irresponsible corporate profit maximization. They argue that ongoing and increasing levels of global outsourcing will have disruptive effects as white-collar workers face unemployment. They also point to inequalities in the benefits of global outsourcing and lack of evidence of poverty alleviation in developing countries.”

Regarding social sustainability, global outsourcing has caused considerable controversy and public debate.  Global outsourcing critics posit that GITO presents the potential for unfettered and irresponsible corporate profit maximization. They argue that ongoing and increasing levels of global outsourcing will have disruptive effects as white-collar workers face unemployment. They also point to inequalities in the benefits of global outsourcing and lack of evidence of poverty alleviation in developing countries.  On the other hand, proponents are more optimistic and perceive global outsourcing as promoting efficiency, helping developing countries by providing jobs where unemployment is often very high, transfers information technology and knowledge and encourages the educational process in less developed countries.

The increasing importance of social and environmental sustainability has brought a growing number of standards, watchdogs, auditors and certifiers aiming to institutionalize and harmonize practices globally.   To date, the global outsourcing industry has not defined sustainability standards although at least four potentially relevant sustainability standards may be appropriate: the first is the Global Reporting Initiative (GRI) which provides a consistent standard for reporting sustainability activities.  The second is the SA8000 standard from Social Accountability International (SAI) which defines global standards for working conditions.  Third, the ISO organization has drafted ISO 26000 which defines a set of standard practices across all industries for sustainability activities.  The fourth standard is the United Nations (UN) Global Compact, which defines ten universal principles.  The “Fairtrade” organization may also offer appropriate sustainability standards for the industry.

From our interviews with providers, consultants and buyers, it is clear that there is sustainability knowledge and capability required by both buyers and providers of global outsourcing.  We have identified five areas of relevance.

Understand relevant sustainability regulatory requirements.  Global IT outsourcing requires both buyers and providers to be aware of government and NGO standards and regulations. Knowledge will be required of relevant regulations and capability in how they should be applied to the outsourcing environment. For buyers this suggests that outsourcing requirements, usually described in an RFP document, should refer to regulatory and legal social and environmental sustainability requirements in the jurisdictions that the buyer operates.  Providers, knowledge and capability will be needed in the area of global, regional and national regulations and statutory requirements. Providers should understand the current and emerging sustainability requirements in all jurisdictions where they, and their clients, operate.

Anticipate stakeholder sustainability expectations. A capability will be needed that allows an organization to monitor and manage stakeholder expectations. For buyers this suggests a reporting capability to deliver information to interested stakeholders regarding sustainability performance and compliance with relevant laws, regulations and guidelines.  Buyers should expect to work with outsource providers to build this reporting capability, since some or all of the data may come from the outsource providers operations.  Providers should work closely with buyers to provide measures that meet global quality standards.  Providers will need to measure and report how they are supporting individual client performance.

Respond to sustainability inquiries.  Outsourcing buyers and providers should expect enquiries from stakeholders that will include government regulators, customers, news media, NGOs, shareholders, unions and employees.  Buyers should be capable of capturing, analyzing and responding to sustainability inquiries that will include information about outsourcing arrangements. Providers should be prepared to work closely with outsourcing buyers to provide accurate timely responses to inquiries. The capability of a provider to respond will reflect directly on the buyer’s external reputation.  In anticipation of sustainability enquiries, providers should work with buyers to prepare an information repository of client specific sustainability information.

Embed sustainability in ongoing operations.  Our research shows that sustainability is not a short term or transitory issue.  The challenges of social and environmental issues, along with developing global standards, will require organizations to embed knowledge and capabilities into ongoing operations.  For buyers, performance measures should be built into outsourcing governance, using SLAs and other contractual mechanisms.  Buyers should expect to provide regular outsourcing sustainability reports to their stakeholders, both within and external to the organization. Many of the larger providers already do this along with their clients.  Providers should bring leading sustainability practices that will help clients improve their knowledge and reporting capabilities. Outsourcing providers should also offer buyers a reporting process that will dovetail and support the client requirements and obligations.

Develop a sustainability culture through hiring and education. As described in the fourth knowledge and capability guideline above, sustainability will be a long term issue to which buyers and providers must adapt.  Organizations will need an ongoing program of hiring and education that builds a culture of social and environmental sustainability.  A positive profile will be helpful in attracting and retaining promising young talent.

There is much further research ahead at the Centre for Development Informatics on this important global topic. For example, the authors are now exploring current performance of the top global outsourcing firms to understand how these firms are adopting global standards.  Working with an industry organization, the researchers are now collecting data on how receptive outsourcing firms would be to an industry defined code of conduct.  This topic, and related research, will continue to rapidly evolve in the near future.

Image provided courtesy of: http://www.flickr.com/photos/alancleaver/2255593941/

For more information on the centre for development informatics visit:

http://www.sed.manchester.ac.uk/research/cdi/

The financial crisis has touched every country in the world, including the developing countries. Globalisation has meant that the world economy has become integrated, that there cannot be a major downturn in the world’s richest country without implications for every other country.

There are multiple channels through which this crisis is affecting all the countries of the world. The most direct channel through which it began was, of course, financial markets. Financial flows, which were so strong in good years, are now reversing, meaning that access to finance is becoming a problem in many developing countries.

A dramatic fall in the flows to developing countries is projected; in some cases, there may actually be reverse capital flows. Another channel is the unprecedented fall in exports. The declines are of a magnitude that no one ever expected to see. Furthermore, there are impacts through remittances and labour flows. Inevitably, when employment goes down, immigrant labourers are among those first hurt.

“What this highlights is the importance of economic policy and organisation. It is not our resources that have disappeared. It is the way we organise those resources to create jobs and to create value.”

It is a truly global crisis, and within a globally integrated economy, a crisis of this kind can only be addressed globally.

There is agreement that we need to have a global stimulus, but countries in the developing world do not have the resources to finance a stimulus package. Unless they receive substantial assistance, these countries will not be able to engage in counter-cyclical policies, and there will thus not be a quick, robust recovery in a large part of the world that is being most affected by the crisis.

However, there is another problem, in addition to the lack of resources: the lack of policy space. Markets are at the core of a well-functioning economy, but, by themselves, they are not enough. There needs to be a balance between the role of the market and the role of the government. Understanding when markets work and when they do not, and the limitations of markets as well as the limitations of government, is an essential part of developing appropriate policy frameworks.

The nature of the problem that we face today can be put in the following way. The people in the global economy have the same skills as before the crisis, and the machines and real resources are the same as before the crisis. The problem is that there is an organisational failure, a coordination failure, and a macroeconomic failure. We are failing to put to work these human and physical resources to produce output.

What this highlights is the importance of economic policy and organisation. It is not our resources that have disappeared. It is the way we organise those resources to create jobs and to create value. The challenge, in going forward, is to try to create the aggregate demand that will put those resources back to work.

The question is: what kinds of policies and reforms are likely to do that? If we start asking that question, we realise that many of our policy frameworks in recent decades have been making things worse. We have weakened our automatic stabilisers by weakening social protection, and we have destabilised the economy by making wages more flexible rather than providing job security. We have created greater anxiety, which, in times like this, increases savings rates and weakens consumption. All of these so-called reforms have made our economic system less stable and less able to weather a storm.

As we acknowledge the problems posed by the current crisis, it is imperative to keep in mind the importance of maintaining the automatic stabilisers and the social protections. For a robust and sustained recovery, we must also address the underlying problem of insufficiency of aggregate demand, caused by global inequality as well as inequality within countries, and the build-up of excessive reserves, which is related to the global imbalances that have been a cause of growing concern in recent years.

Unless the problems in developing countries are addressed in a more effective way than they have been in the past, the inequality will increase and the demand for excessive reserves will grow even greater.

Professor Joe Stiglitz is Director of the Advanced Graduate Workshop on Poverty, Development and Globalisation at the Brooks World Poverty Institute, University of Manchester. He was awarded the Nobel Prize in Economic Sciences in 2001.

This article is based on an address to the Governing Body of the ILO and was reproduced from: http://www.bwpi.manchester.ac.uk/

“Until recently, recessions were regarded as normal events in a healthy economy, a rebalancing of supply and demand within a complex system. This point of view was encapsulated long ago in a famous remark by William McChesney Martin Jr, chairman of the Fed under President Eisenhower. The function of the central bank, said he, was ‘to take away the punchbowl when the party is getting good’. In other words, it should induce a slowdown in activity by raising interest rates when the economy grew superheated.

This point of view was upheld by his successor, Paul Volcker, some decades later; when faced with ‘stagflation’ (economic stagnation accompanied by inflation) under President Reagan in the 1980s, Volcker did not hesitate to raise interest rates and induce another recession, restoring sound economic growth after a period of adjustment.

In the late 1990s, however, the world was seized by a curious delusion, which may be referred to as Myth of Entitlement.  Everyone was entitled to the good life! You could and should own a house, whether or not you could afford it. You were entitled to a job, whether or not the economy could provide it. Company directors were entitled to be paid extraordinary sums of money, whether or not they had earned it. Above all, society was entitled to enjoy infinitely expanding prosperity.

“A double dip recession would now appear to be the least bad option facing the world. To avoid ‘fiscal catastrophe’, the British, American, Greek and other governments must bring their national budgets under control forthwith by a mixture of lower expenditure and higher tax.”

The new Chairman of the Fed, Alan Greenspan, was a victim of this Myth. When he detected the existence of a powerful financial Bubble in 1996, he did not set out to kill it, as Martin or Volcker would have done. Instead, he renamed it ‘irrational exuberance’ and inflated it further by lowering interest rates. Far from ‘taking away the punchbowl’, he poured vodka into it. Eventually the bubble would burst of its own accord; the consequences were much worse than they would have been if he had punctured it a decade or more earlier.

Greenspan performed his malign tricks with the strong support of his acolytes, Tim Geithner and Ben Bernanke, today’s Treasury Secretary and Chairman of the Fed. In 2009, this terrible duo would compound their error by introducing a line of cocaine into the punch bowl, re-inflating the Bubble. Last week’s Economist summed up the results of their activity in eight words, appropriately enough on its thirteenth page: Mr Obama’s budget reveals a roadmap to fiscal catastrophe.

A double dip recession would now appear to be the least bad option facing the world. To avoid ‘fiscal catastrophe’, the British, American, Greek and other governments must bring their national budgets under control forthwith by a mixture of lower expenditure and higher tax. Let Britain lead.”

Will Hopper

“The UK deficit is large but there are many worse countries. Sterling does not face the same challenges as the Euro (Greece and all that). Providing international investors can see a commitment to movement in the right direction, then I believe that sustaining the recovery is more important than rapid reductions in government spending that would damage short-term economic prospects.”

Francis Chittenden

“It’s not a technical question about withdrawals versus injections of stimulus. Because nobody knows how much stimulus is enough. – or where exactly the economy is going.

Instead ‘how fast should we cut?’ is a political question centred around two issues:

(1) What kinds of cuts in public services (and employment) are possible and desirable? There are different answers to this from both the left and right.

(2) How quickly will we face gilts strike or confidence problems in the bond markets? That depends on how the crisis about governments selling debt moves on from Greece.”

Karel Williams

“Well, it will have to be brought down decisively, but given the degree of the state deficit (about 13 per cent of GDP) it will take a while. The old rule of thumb is that the state deficit should be reduced by about 0.5 per cent per year to avoid external shocks. Given that rule it would take 26 years to reduce the state deficit, which is clearly unsustainable. My suspicion is that future governments will try to reduce the budget deficit by about 2-3 per cent per year. Any government has to tread a very careful balance between avoiding losing the trust of financial markets but also preventing the economy from falling into negative growth territory.”

Tom Kirchmaier

“I think that both sides are partly right and partly wrong. Stiglitz is wrong to encourage fiscal stimulus in the absence of a clear and credible plan for bringing the finances into line in the medium term.  I think the timing of the General Election has been very harmful to the UK because none of the political parties have been willing to produce a clear and credible plan before the election. The key thing now is to get the election out of the way as soon as possible, preferably within 7 weeks. The country can’t afford to wait until May.

The economists who wrote to the Times seem to me to have a limited understanding of how the Public Sector works. The Labour government pushed too much money too quickly into the public sector. This has resulted in a lot of waste including some unsustainable public sector wage packets and pensions. Sensible planning is needed to identify the areas throughout the public sector where it is possible to achieve efficiency savings and cuts in salary levels without damaging services. The NHS should not be exempt from these plans. The NHS has wasted a lot of the money pumped in by Labour. The politicians are scared to admit this to the electorate, but the NHS should not be treated as a sacred cow. Thus I agree with the economists who wrote to the Times that a credible plan for bringing the deficit under control is urgently needed, but also I think that there needs to be a carefully considered and comprehensive plan for the whole of the public sector in which no area of spending is off limits. Such sensible planning will take time if it is to be credible and deliverable politically.”

Martin Walker

“It’s too early to pull the supportive arm away as business and consumer confidence remains shaky – as Mervyn King said we are bouncing along a rocky plateau. At the same time, the Government has to demonstrate credible commitment to re-establishing sound finances. The really difficult question is how to do both? I suspect it needs a transparent and coherent shift in priorities for the next generation, where the government reinforces the shift toward savings and investment for long-term sustainable growth. That’s not easy for politicians in a run up to an election especially if it looks like a close call.”

Christopher Birchenhall

“The macro-economics of this deficit has to be considered beyond dogmatic monetarist and Keynesian perspectives because the cause of the deficit, a banking system that mis-allocates capital, is likely to de-rail the economic recovery packages of both schools of thought. The extra-ordinary profits in investment banking in 2009 when there was almost no economic growth in Western economies, and the recent attack on Euro and the government bond markets in Greece, Spain and Portugal should be warning signs. I do not think the size of the deficit is important and this, in a very simplistic way, makes me Keynesian. But what is more important than the size of the deficit is how the deficit is financed, for which the Keynesian school has no clear answer. Therefore we need Keynesian policies in a structurally reformed financial landscape.”

“The budget deficit should be financed directly by pension funds which will provide low cost long-term funds and higher welfare benefits to the society. Pension funds will benefit too because such sovereign bonds will help solve the current problems of uncertain capital values and unpredictable returns from short duration assets that pension funds face. A pension fund-financed deficit will then allow governments to concentrate on sustainable long-term policies for economic growth and job creation. The current un-reformed banking system, on the other hand, as the EU countries in general and Greece in particular have recently experienced, is likely to damage long-term investment plans in both public and private sectors by forcing governments to issue shorter term high-yield bonds in a perpetually volatile environment. Policy makers and academics need to discuss not the size of the deficit but the suitable financial intermediation mechanisms for high public deficit, that is absolutely necessary for economic growth, in the next ten years or so.”

Ismail Erturk

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Universities have always been difficult organizations to manage. But there are good reasons for this. In different ways, their core activities of teaching and research are both very sensitive to context. Research projects and classrooms are like snowflakes, with the same general form, but unique in the details. In such an environment, the ‘right’ solution to a problem is difficult to determine in advance. The micro-management of teaching and research therefore depends on flexibility, the ability to think on one’s feet and make rapid decisions where the outcome is uncertain. One draws on the experience of the past where necessary, and evaluates new possibilities or courses of action with respect to the specific context. Thus, effective work in higher education (HE) requires a deep understanding of context, built through reflection on the teacher or researcher’s professional activity. These needs have contributed to the professional autonomy that has historically been offered to academics, and the requirement for continuous professional development, as is true for other professional groups. It also contributes to what Weick called the “loosely coupled” nature of the university and the ensuing difficulties of co-ordination and strategy formation.

“How are universities going to learn to meet these new demands, when in Gooley and Towers’ memorable phrase, they are akin to “ocean liners”, requiring an age to change direction even slightly?”

However, like other public and semi-public institutions, universities are now under considerable pressure to reform their management structure and how they undertake their core activities. This has happened for several reasons. First, increased accountability and good auditing practice are demanded across all university activities, especially those which are funded by the state. An increased global demand for HE has opened up new markets, but also led to the penetration of the private sector into countries outside traditional academic heartlands like the US and Europe. Improvements in communications have made online learning more feasible, but they also place universities in competition with many more institutions worldwide. These technological changes have drawn attention to the difficulties universities have with disseminating innovation and managing change. The traditional, autonomy-based structure of the university can effectively foster innovation at the micro-scale, but is poor at scaling these upwards or transferring innovations into different contexts, such as from department to department, or from postgraduate to undergraduate teaching.

Most universities have responded to these pressures by increasing centralisation.  This has largely been achieved not by asserting the direct management of teaching and research, but through increasing control over procedures, principally auditing, budgeting and the use of technology. There has been a strengthening of university technostructures (a term coined by Henry Mintzberg, which he used to refer to those parts of an organisation “mandated to plan and control the work of others”). Large and complex organisations, universities have always needed a big support staff to assist the work of the professional core, and the maintenance of a campus and library, the marketing of the institution and so on have historically been undertaken centrally. But what is new is the increasing use of techniques familiar in other sectors but culturally alien to academia: centralised financial planning, business process analysis, the provision of a student management system like Banner and so on. Increasingly, academics are also provided with a single campus virtual learning environment (VLE) that they are expected to use. This centralisation through control over technology and procedure is akin to the “new managerialism” being applied throughout the public sector. (For an analysis of these trends see Robins and Webster’s collection, The Virtual University.)

“The trick for the 21st century university is not to replace the loosely coupled, autonomy-based structure with one that lies at the other end of the scale, but of how to find the best of both worlds.”

Yet there is no evidence of these changes enhancing universities’ ability to respond flexibly to changes in its market and general environment. On the contrary. Since the 1960s the sociology of academia has been analysed by writers such as Pierre Bourdieu, who in his Homo Academicus recognised that universities, far from being creative and responsive to demand, were innovation- and risk-averse. Centralisation, and the implied concentration on existing strengths and single strategic visions, does not promote innovation and creativity, as Ralph Stacey recognised in Managing Chaos. The processes described above are, at best, one-off changes of practice that result in one particular model of learning management – one “vision” for how teaching should be run – becoming reified into a technology which the university then becomes locked into, even after the system has outlived its usefulness. The VLE has been called, in a recent conference at the University of Wolverhampton, an “undead” technology: one that has seen its time pass, but which still retains signs of life. VLEs allow the university to spread its reach globally, to record, and thus audit, student and staff activity, and to integrate this work with other aspects of campus management such as enrolment and budgeting: but they also reify practice around a “one-size-fits-all” solution and risk retarding the very flexibility and creativity on which teaching and research depend.

Yet universities are now being expected to demonstrate they can be creative on a sector-wide scale. In December 2009 the Business Secretary Peter Mandelson, wrote to Tim Melville-Ross, head of the Higher Education Funding Council for England (HEFCE), and outlined his vision for the next decade as follows (the letter can be read in full on the HEFCE web site):

We want to see more programmes that are taken flexibly and part-time and that a learner can access with ease alongside their other commitments…. we will want some shift away from full-time three year places and towards a wider variety of provision…. I am also asking you… to devise new funding incentives for higher educational programmes that deliver the higher level skills needed [by business]. This will require a robust way of identifying those programmes and activities that make a special contribution to meeting economic and social priorities, and a mechanism to redeploy funds, on a competitive basis, to those institutions that are able and willing to develop new or expanded provision in these key areas.

Mandelson’s reference to flexibility is presumably an indication that the government want learners to be able to access education at a distance if necessary, and outside standard 9-5 hours and the university semesters. But the latter part of this quote also implies that a “just in time” approach to the design of degrees will benefit institutions directly. Those universities which can achieve this kind of flexible response to the needs of the market will have an advantage in subsequent funding rounds. How are universities going to learn to meet these new demands, when in Gooley and Towers’ memorable phrase, they are akin to “ocean liners”, requiring an age to change direction even slightly? Particularly when Mandelson accompanied his letter with news of substantial cuts in HEFCE funding, which will inevitably mean a lack of resources for any large capital investments in new technologies or structures for the foreseeable future?

Transforming the core activities of universities through the use of e-learning and other ICTs can occur, but because teaching, to remain of high quality, must be sensitive to context, this is a process with multiple possible end-points. The danger is that an approach which pulls management and professional practice into inflexible technologies, provided centrally across a campus and with their use mandated by policy and technostructural controls, will damage the university’s core business. The risk is that academic autonomy and professional development are seen primarily as obstacles to change. The former can be this: that is admitted. But, by definition, the latter is not. Instead, CPD plays an essential role in retaining the quality of a university’s core activities. Without such quality the university is under threat, either generally, or from competitors offering a better service. It is a fallacy to imagine that all students are demanding new technologies, but there is a widespread increase in demands for assured quality in HE. Several Russell Group universities have recently experienced protests led by Students’ Unions around what students see as a reduction in quality due to the introduction of e-learning.

Flexible management requires a flexible technological base. This is true of any organisation. Because the core activities of universities are context-sensitive, and are generated, ideally, by continuous professional development, then managing the technology-rich university requires the development of CPD structures which incorporate technology not as something which is provided in a finished form by the centralised technostructure, but which is, at least potentially, generated wherever teaching, learning and research take place.

“Such experimenters were not seen as “mavericks” or dissenters, but as the early shoots of what the university might look like in ten or twenty years’ time. They could respond flexibly to changes in markets and technologies and, through monitoring and professional development networks, disseminated new innovations across the campus as they became proven.”

Such learning can result in changes to practice across the university, as long as it is resourced and managed in ways which preserve the possibility of experimentation and flexibility. A couple of years ago, I interviewed the CEO for e-learning from a major US public university (who must remain anonymous due to constraints placed on my use of data). I do not claim that his view is unanimously held, but I offer it as an example of how the value of autonomous professional enquiry into technology can be perceived by a member of senior management in a large university. My research partner (Dr Angela Benson from the University of Alabama) and I had used three different degree programmes on this campus as case studies: one used WebCT, which was the institutional VLE at the time, but another had developed and maintained their own bespoke system, and the third took a laissez-faire approach with its teaching and development staff, permitting them to use whatever system best met their personal needs: as a result many used Moodle. I asked the CEO if he was happy with this diversity and he answered:

I’ve grown to think it’s not exactly the right thing to do… On the other hand, and let me give you a completely different line on this, I do not want to be locked into a vendor, I think a campus CMS is a big behemoth, and it’s hard for us to switch. So having multiple labours on campus is actually good for vendor relationships…. Also innovation can happen in more dimensions when we have more flavours going on. Resource is tight for supporting things of this nature at the campus level, so we tend to be utilitarian, and not creative. The units are more likely to be creative, and that’s to be encouraged. Personally I would like to be doing all the creative activity, I got into this profession because of that, but I fully understand from a business model point of view, it’s unlikely to happen given current resource allocation, so from that sense I think that the distributed approach to different systems is a good idea.

The key question, for this manager, was from where the next generation of e-learning innovation would come. He recognised the technostructure had no mandate to undertake the creative work required. These technologies continue to change, and as he said, the large, institutional VLE has benefits for accountants and those who are responsible for ICT infrastructure, but from the point of view of the core professional activities it can be a “behemoth”. This university therefore not only tolerated, but resourced, experimentation around the campus with new technologies while still offering centralised technological support to those programmes which needed and desired it. Such experimenters were not seen as “mavericks” or dissenters, but as the early shoots of what the university might look like in ten or twenty years’ time. They could respond flexibly to changes in markets and technologies and, through monitoring and professional development networks, disseminated new innovations across the campus as they became proven. Ultimately, technology in this university was distributed in ways which allowed the academics to view it as an opportunity, not a threat to their autonomy.

In Managing Chaos, Stacey forcefully claims that in the face of uncertainty, long-term strategic planning is a mere palliative with no real observable effects on the sustainability of an organisation. If universities are to respond to new challenges and offer flexible programmes supported by technologies which are in a constant state of evolutionary flux, then centralisation is, by definition, counter-productive. The trick for the 21st century university is not to replace the loosely coupled, autonomy-based structure with one that lies at the other end of the scale, but of how to find the best of both worlds. The field might be wide open for the first institution – which may be a private sector one – that pulls off this trick and then finds a way to flexibly expand its capacity to deliver “just in time” teaching.

Drew Whitworth is programme director for the MA course in Digital Technologies, Communication and Education at the University of Manchester.

For more information on the centre for development informatics visit: http://www.sed.manchester.ac.uk/research/cdi/

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It seems bizarre that Toyota is in the headlines for all the wrong reasons. It is regarded as the best-run car company in the world, whose reputation is built on reliability, safety, and customer satisfaction. Their models (along with other Japanese constructors such as Honda and Nissan) tend to dominate the top of customer reliability surveys produced by Which and JD Power. Toyota executives are very much engineering people, who have spent their entire life with the one company and know the business inside-out. Toyota’s philosophy has been to focus on the quality of their cars, not on financial engineering or flashy marketing.

“Japanese society strongly values honesty and integrity. At least with Toyota admitting error so dramatically and willingly taking the huge financial hit from recalling and repairing the vehicles, it might avoid the same fate of Mitsubishi Motors.”

Toyota’s dramatic recall of around eight million vehicles worldwide looks as if the company is spiralling out of control. This is a major crisis and customer anger is understandable. But at least Toyota appears to be doing its best to repair the damage. In 2000 and 2004 Mitsubishi Motors was forced to admit that it had covered up safety faults going back decades which management knew about. This was one of the biggest scandals in Japanese corporate history and it nearly destroyed the company. Even today, although the wider Mitsubishi Group brand seems to remain highly respected, Japanese consumers continue to shun Mitsubishi Motors because of the company’s perceived lack of honesty. Japanese society strongly values honesty and integrity. At least with Toyota admitting error so dramatically and willingly taking the huge financial hit from recalling and repairing the vehicles, it might avoid the same fate of Mitsubishi Motors. It remains to be seen what effect the recall will have on Toyota’s long-term sales elsewhere in the world. Toyota executives are said to be very fearful of a slump in global sales, and the recall is designed in part to reassure consumers that safety remains the company’s number one priority.

Perhaps the moral of this story is that nothing can be taken for granted in world business. Such is the ferocity of international competitive pressures, that no firm is immune from potential disasters. While Japanese firms have scored highly on consumer satisfaction scores for some years, the differences in these scores have been narrowing as US and European manufacturers have increasingly adopted Japanese –style production systems such as ‘lean manufacturing’, or developed Six Sigma process-improvement methodologies.  The gap in quality and reliability is narrowing, and it remains to be seen if Toyota will be able to stay on top of the customer satisfaction charts in any case, even without the reputational damage of the accelerator pedal saga.

Leo McCann is a lecturer in international and comparative management at Manchester Business School.

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Professor Karel Williams said that Obama’s proposals, which include a plan to limit the size of banks and restrict proprietary trading, were “hugely politically significant – even if they’re not going to deliver complete reform of banking.

Acknowledging that the US President will be met by fierce resistance from American bankers, he said Obama’s regulatory crackdown on banks went “well beyond what was envisaged by Geithner in last year’s White Paper” and also brought “populism and political anger against bankers into the policy making sphere.”

The director of the University of Manchester’s Centre for Research on Socio Cultural Change added that Obama’s approach reflected a major shift in the political climate.

“I think the technocrats are going to use the populism as a way of levering some more power against the failing, limp European politicians.”

“It’s quite interesting that when Obama introduced his measures he used really populist language about getting our money back for the American taxpayer and all the rest of that,” he explained. “I think that does inaugurate a new stage in the management of crisis.”

However, he was critical of the political response across Europe, accusing politicians of lacking the courage needed to tackle a failed system.

“It’s been very interesting looking at the European reaction and there I think you can distinguish between the politicians and the technocrats,” he said. “The political response has been exceedingly weak and involves leading from behind. Particularly if you look at the Conservative Party opposition in the UK with George Osbourne saying yes of course he thinks the Obama plan is an excellent idea and he’ll do it as soon as everyone else in the world has done it as well.

“But quite interestingly here we have the Treasury Select Committee and the Governor of the Bank of England saying that they think Obama’s plans are good and that breaking up banks was a good idea. And we’ve also had endorsement from the head of the European Central Bank.  So I think the technocrats are going to use the populism as a way of levering some more power against the failing, limp European politicians.”

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