A spokesman for BA, Mr Willie Walsh, said : “The combination of unprecedented oil prices, economic slowdown and weaker consumer confidence has led to substantially lower first quarter profits.” “But,” He said ”British Airways is well prepared and has adapted its plans in the event of further economic uncertainty.”

These reported performance figures for BA and their smooth denial of concern reminded me of the last time BA management hit the news.

It was several years ago and Rod Eddington, the then chairman of British Airways, was responding on TV to concerns about the profitability of British Airways.
He was having a moan about how the budget airlines were cutting into his market share,
but he was still being quite bullish about it.
He told the interviewer how, in the last three years, he had cut the operating costs of British Airways by 5% and that although the competition was tough they fully expected to maintain their market share.

What he didn’t say was that in the past three years, to make that 5% saving, he had made redundant 16,000 members of his workforce.

He must have had some idea of the consequences of those redundancies for the remaining workforce. How did he think they felt about it?

Did he think they still felt good about working for British Airways?
Did he think they still felt their jobs were secure?
Did he think they felt proud of what had happened.

At the time Rod Eddington seemed supremely unconcerned by any of the consequence of his actions other than the ability to boast about the financial savings he thought he had made.

The men and women who worked for BA had. in the main. been in  their dream jobs.
Pilots, who as schoolboys had pictured themselves wearing Raybans while they lounged around in the cockpits of big jets.
Cabin crew who used to dream of all the exotic destinations they would go to.
Baggage handlers and support staff who at the time could use BA to nip over to Paris for the weekend for the price of a cup of strong coffee.

And then, by making 16,000 redundancies, Rod Eddington had at a stroke completely changed the way that the remaining BA employees felt about what they did.

He had changed their attitudes and behaviours from those of a proud group of motivated people, dedicated to the service of their customers, to a bunch of disillusioned job hunters.
By making these redundancies British Airways changed the behaviour of their whole workforce from a powerful group of people who were proud of what they did, to an apathetic, untrusting workforce who were only interested in where they could send their next CV.

In the latest twist in the saga of the failure of BA we read of the appeal from the current management for the workforce of BA to give the company one months work without pay to try to save the company.

Since the days of Rod Eddington, management at BA have completely lost the loyalty of their staff by the way that they have behaved towards them, creating a morally bankrupt organisation,
Make no mistake, this moral bankruptcy was caused by BA management.
Now we see the current management attempting to cash a cheque against the BA account that they themselves have already emptied.

It is possible that the company will fail without these individual contributions from the workforce, The workforce must be aware that it is just as likely that the company will fail even after they have put themselves into personal debt to try to keep it afloat, the only difference being that when the company fails, even after the workforce have given their time for free, the workforce will be in an even worse position to support their families.
Either way, management have already broken the trust of the workforce and since none of the management team seem to have offered to work for nothing it seems even less likely that any of the workforce will be persuaded to stick their necks out.

Do BA management truly believe that the workforce, working for nothing, will save them or are they working a spin, which when the company goes to the wall will enable them to say
“It was not our fault, We were let down by the workforce who would not support us.”

In this ongoing crisis we have to be very careful about what we do to survive and how that changes the way that our remaining workforce feel about they are asked to do.

Ride roughshod over the workforce during the recession because you can, and like BA you will have a very hard time continuing to trade even when the rest of the world has resumed doing business, Or, take care of your people when they most need it and they will take care of you when you need it.

We can’t have it both ways.
What goes around comes around.

If we want to get a teenager to clean their room our first instinct is to tell them to do it. They are children, we are adults. It is our function to prepare them for life and part of that preparation includes telling them what to do, because we know best.

Yet how often when teenagers are told to clean their rooms do they actually do it?

Unless there is a very heavy threat attached to the order the chance of any teenager actually cleaning their room is practically zero.

We know this because we ourselves never used to clean our rooms and, based on the evidence of our own eyes, neither do our offspring.

So why, when we are faced with overwhelming data demonstrating the utter futility of telling our teenagers to clean their rooms, do we still persist in creating pointless conflict by telling them to do things that we know they never will.

At least we are right about one thing.

Telling teenagers what to do does prepare them for life because when they find a job they will discover that their managers will spend most of their time creating pointless conflict by telling them what to do.

Their managers, whether the object of their own teenagers antipathy or not, are unlikely to have understood that what makes a teenager resist being told what to do also holds true for the rest of the population.

Their managers will continue telling the workforce what to do believing that it is only as a result of this constant instruction that anything is done at all, not realising for a minute that by telling their workforce what to do the manager causes them to react in exactly the same way that the teenagers do when told to clean their rooms.

Telling people what to do actually destroys their ability to do it.

People enjoy challenges; we enjoy achieving our goals and being proud of what we have done.

What we hate is being told what to do.

So when we are told what to do we resist, not because we object to what we have been told to do, the resistance occurs because we object to being “told” what to do.

If management set a target for the workforce it appears to the workforce as an arbitrary statement, not based in reality, telling them what management think that they should be doing. Management are essentially telling the workforce what they should be doing and the workforce react against their desire for control by seldom, if ever, achieving the management target.

The workforce are accustomed to management setting unachievable targets and management are accustomed to the workforce failing to achieve their targets, never once doubting that the failure is the fault of the workforce and not the fault of management for setting the target in the first place.

By setting the target management almost guarantee its non achievement.

Catch 22,
By setting targets, by telling people what to do, we are actually creating the conditions that prevent them from achieving the very thing that we have instructed them to do.

How then can we get people to do what we want if we cannot tell them what to do?

Consider the teenager, they do not want to live in unsanitary squalor, they are forced to do it because they are continually being told to clean their rooms.

In the same way the workforce do not want to be perceived as unmotivated failures but this is what they are forced to be in reaction to the attempts of management to exert control.

The problem is “telling” people what to do. If instead of telling other people what to do, we listen to what they want, we can then help them to achieve something.

The “something” that is achieved may not be exactly what we wanted but it will be an achievement that everybody can take pride in.

It will be orders of magnitude better than the destructive resistance that is created every time we try to get our own way by telling other people what we think they should be doing.

The report, in its introduction, sets itself out to report on the potential benefits of engagement for companies, organisations and individual employees, and as it states later, it is not meant to be a “How to Become Engaged” guide, which is a pity because one of the themes that runs through the report is the confusion over what engagement is and the effect that it has on performance.

The report has been created with reference to surveys of many individuals and organisations and the compilation of statistical evidence is awesome, but most of it appears to have been gathered from the same people who are suffering confusion about what engagement is.

There is no feel in this report about what a phenomenal difference an engaged workforce  makes, no understanding of the market dominance that comes with engagement or the flexibility, imagination and pride that an engaged workforce generates.

The engaged workforce is the result of an extremely simple change in the way that managers manage and the result of this change is an earth shattering performance that cannot be competed with by any organisation running a conventional “Command and Control” management strategy.

We had in this report an opportunity to get rid of the confusion that surrounds the concept of engagement. What could have been an extraordinarily insightful initiative got bogged down with phrases of faint praise like this quote from the report: “Work is good for physical and mental wellbeing.”

This sounds like a line written by Harry Enfield for Mr Cholmondly-Warner, instead of the most exciting thing that has happened to our understanding of how to manage our workforce since the brilliant work of Douglas McGregor in his 1960 book, “The Human Side of Enterprise.”  To still be confused about what we should be doing fifty years later is not encouraging.

An employee at the phone company O2 is quoted as saying: “One thing that really stands out at the moment is the help and support we get from the management team. They’re really listening to their people.”  But in the feedback from their Head of  “Employee Involvement and Experience” there does not seem to be any acknowledgement of just how key this simple statement is.  It is as if what management are doing happened by accident, instead of being the cornerstone of a deliberate policy to change the way the workforce feel about what they do, to engage them.

Later in the report we are told that barriers to engagement are “confusion and misunderstanding,” but at the same time the report quotes Professor John Oliver of the Northern Leadership Alliance as saying: “Ninety Nine percent of failure to engage staff is due to management behaviour.”  There does not seem to be any confusion about that statement. The barriers to engagement are created by the behaviour of the managers!

On the first day at work every employee is engaged. They are happy to be there, they know the skills that they have to bring to work and they are looking forward to being able to use them to make a difference. The workforce’s natural engagement and desire to be effective is killed off by the things that management subsequently do to them.

The authors of the report tell us that there is no Silver Bullet that will cause people to engage. Perhaps that is because they are looking at the wrong end of the gun. Instead of looking for the bullet that will make people engage they should have been looking for the bullet that would stop people from disengaging, because that one is blindingly obvious. Find out what managers are doing that causes the workforce to disengage. Then stop them from doing it!

Vic Bayliss, the Director of Customer services at Westminster City Council got it in a nutshell. He said: “Staff have seen this as a programme that is being done with them, not to them.”  In this report Vic shows a rare perception that is unfortunately not shared by the bulk of the contributors.

I sincerely hope that this report does not have the effect of turning the concept of Engagement into the level of another “Management Good Idea” that will be used, as has been stated on several different occasions in the report, as a way to get the workforce to accept what management want them to do. When used in this way it becomes a cheap trick alongside many other “Management Good Ideas” that failed as soon as the workforce realised that management were just trying out another way to manipulate them.

Real engagement is the result of an ongoing collaboration between management and the workforce that produces the sorts of comments that were quoted by the O2 employee, not the result of a single initiative, survey or desire to manipulate.

Download the complete report from: http://www.davidzinger.com/employee-engagement-macleod-review-this-is-required-reading-3523/

There were the usual nods of recognition around the table then our friend indicated the woman sitting on her own at the head of the table. It was obvious that this was an office party and the woman sitting on her own was the manager, even before our friend introduced her. Our friend said that she was the office manager, and the rest of the girls were the team who worked with her. The way they had arranged themselves around the table spoke volumes for their work relationships.

The manager sat at the head of the table, obviously because she was under the impression that she was the most important person there and therefore should have the most important seat, even at a social gathering. Our friend was the supervisor, second in command in the office, and therefore had to sit near her boss to show support, but even then she placed her husband between her and the boss so that she was not sitting too close but, as the supervisor, she was still the closest. All the rest of the girls were huddled together at the other end of the table, not a great distance away but far enough to make an obvious gap between them and us.

The manager, appraised of the content of the book turned her hubris up to maximum, demanding to know what right did I have to write books about management when clearly, as a practising manager, she was the expert. The easy answer would have been to explain how dysfunctional her social gathering really was, how that dysfunction was probably a direct result of the way that she managed her team and the relationships that she created at work. Fortunately before that thought had even begun to speculate about the possibility of crossing my mind she gathered her self up and delivered her management philosophy: They think I am a bitch, but that is my job!

I was absolutely gobsmacked.

Here was a manager who, I think not unusually, believed that the job of a manager was to be a bitch to the workforce. It was clear that there was going to be no conversation about how well she thought she was doing as a manager or any expression of desire to become more effective. She was proud to be acknowledged as a bitch and clearly thought that she was doing pretty well at it.

Looking at the cowed fearful expressions of the people she managed I could only agree that she probably was. This was a completely prehistoric management monster who was fully aware of what she was but had built her defences so high that there was no possibility that what she was doing as a manager, or why she was doing it, could be questioned.
She had set herself up as the bitch in the office and saw that as a valid management strategy, to behave like a bitch to frighten her staff into working.

She had not the faintest desire or curiosity to try to figure out if there was a way that she could allow her team to be more effective and therefore impress her own boss with how effective she was as a manager. Worst of all it was probably not even her fault. The ordinary person who spends a large part of their working life on the end of oppressive management practice, when eventually elevated to the position of manager, has no other model of management to copy other than the one that she experienced as a member of the workforce.

Her behaviour as a manager mimics that of the managers that she hated while she was being “Managed” and it is this same behaviour that she will then pass on to the people who will replace her, because they too will have no other behavioural model to work from when they become managers. We seem to be doomed, by our own example, to show each new generation of the workforce the same model of how not to manage people.

To break this destructive cycle of learned oppressive management behaviour we have to find another model. A good place to start might be to Google “Theory Y”.

This other model does exist and has been around for an awfully long time.

A spokesman for BA, Mr Willie Walsh, said last month: “The combination of unprecedented oil prices, economic slowdown and weaker consumer confidence has led to substantially lower first quarter profits…But British Airways is well prepared and has adapted its plans in the event of further economic uncertainty.”

These reported performance figures for BA and their smooth denial of concern reminded me of the last time BA management hit the news. It was several years ago and Rod Eddington, the then chairman of British Airways, was responding on TV to concerns about the profitability of British Airways. He was having a moan about how the budget airlines were cutting into his market share, but he was still being quite bullish about the situation. He told the interviewer how, in the last three years, he had cut the operating costs of British Airways by 5% and that although the competition was tough they fully expected to maintain their market share.

What he did not say was that in the previous three years, to make that 5% saving, he had made redundant 16,000 members of his workforce. He must have had some idea of the consequences of those redundancies for the remaining workforce. How did he think they felt about it? Did he think they still felt good about working for British Airways? Did he think they still felt their jobs were secure? Did he think they felt proud of what had happened?

At the time Rod Eddington seemed supremely unconcerned by any of the consequence of his actions other than the ability to boast about the financial savings he thought he had made. The men and women who worked for BA had, in the main, been in their dream jobs. Pilots, who as schoolboys had dreamed of wearing Raybans while they lounged around in the cockpits of big jets. Cabin crew who used to dream of all the exotic destinations they would go to. Baggage handlers and support staff who at the time could use BA to nip over to Paris for the weekend for the price of a cup of strong coffee.

And then, by making 16,000 redundancies, Rod Eddington had at a stroke, completely changed the way that the remaining BA employees felt about what they did. He had changed their attitudes and behaviours from those of a proud group of motivated people, dedicated to the service of their customers, to a bunch of disillusioned job hunters. By making these redundancies, British Airways changed the behaviour of their whole workforce from a powerful group of people who were proud of what they did, to an apathetic, untrusting workforce who were only interested in where they could send their next CV.

In the latest twist of the BA failure saga, we read of the appeal from the current management for the workforce of BA to give the company one month’s work without pay to try to save the company. Since the days of Rod Eddington, management at BA have completely lost the loyalty of their staff by the way that they have behaved towards them, creating a morally bankrupt organisation. Make no mistake, this moral bankruptcy was caused by BA management. Now we see the current management attempting to cash a cheque against the BA account that they themselves have already emptied.

Is this BA management completely misreading the way that the workforce feels about the company they work for? Or is this a cynical manoeuvre by management to deflect the blame for the failure of the company onto the workforce? It is possible that the company will fail without these individual contributions from the workforce? The workforce must be aware that it is just as likely that the company will fail even after they have put themselves into personal debt to try to keep it afloat; the only difference being that when the company fails, even after the workforce have given their time for free, the workforce will be in an even worse position to support their families when the company goes under.

Either way, management have already broken the trust of the workforce and since no one in the management team appears to have offered to work for nothing, it seems even less likely that any of the workforce will be persuaded to stick their necks out. Do BA management truly believe that the workforce, working for nothing will save them or are they working a spin, which when the company goes to the wall, will enable them to say, “It was not our fault. We were let down by the workforce who would not support us.”

In this ongoing crisis we have to be very careful about what we do to survive and how that changes the way that our remaining workforce feel about they are asked to do. Ride roughshod over the workforce during the recession, because you can, and like BA, you will have a very hard time continuing to trade even when the rest of the world has resumed doing business. Or, take care of your people when they need it most and they will take care of you when you need it most. We can’t have it both ways. What goes around comes around.

What the whole audience knows, but the young man does not, is that the Elixir of Love is just cheap red wine with no magical properties at all.

The real story is that the whole equation was changed by the young man’s belief – changed by the change in his behaviour that was the result of his changed belief in himself, not by any alleged magical properties.

This idea that we can change lives by the way we feel about ourselves or about others is as old as the hills but what we see these days is that this almost magical ability to change the way that we feel seems to be invested exclusively in the high priced motivational speaker.

What Donizetti realized is that this ability lies within all of us and that with the smallest of effort we can change the way that we or other people feel about what we do.

A colleague in North America told me a modern version of this same story. His story was about how we can change the way that people behave by the way that our beliefs make us behave towards them.

The story I was told concerns a local motor vehicle workshop whose principal business was the servicing and repair of cars. The mechanics were a happy bunch who enjoyed what they did and took pride in the service they were able to deliver to their customers.

Then one day the manager of the business decided that the mechanics could no longer be trusted to correctly torque the nuts on the wheels of the cars that they prepared. The mechanics were informed that in future all vehicles leaving the shop would have the wheel nuts checked by the shop manager.

Whatever.

The manager started checking the wheel nuts and it wasn’t long before he started to find wheel nuts that had not been properly tightened. The manager congratulated himself for initiating the effort to double check the wheel nuts. He believed that if he hadn’t done this then his customers would surely be driving off in unsafe vehicles.

What the manager did not understand was that before he had decided to check the nuts, no wheel nuts had ever come off a vehicle that his shop had delivered. The mechanics knew the consequences, should they fail to make sure that the nuts were tight, and as competent professionals they took pride in making sure all the vehicles they delivered were safe.

Then the manager, by his actions, announced that he no longer trusted the mechanics. By checking the nuts himself, the manager was sending a clear message to the workforce that he no longer trusted them.

His behaviour robbed them of any feeling of pride they had in their delivery so they stopped checking the wheel nuts, why should they? The manager had made it perfectly clear that he did not trust them and was checking the nuts himself. The result, some wheel nuts were now leaving the shop loose.

The manager by believing that the mechanics could not be trusted to tighten the wheel nuts had changed the way that the mechanics felt about what they did and thus the way that they did their work. He had changed his workforce from proud motivated professionals into people who no longer gave a damn.

What is so awful about this story is that the manager, by finding loose nuts, was convinced that his input was essential to ensure the safety of his customers. What he did not understand was that was his behaviour that caused the problem.

The poet and philosopher Goethe said in 1746 “If we treat people the way we think that they ought to be, then that is what they will become.”

Two hundred and fifty years later this manager had, by treating his mechanics as if they were untrustworthy, made sure that they did in fact become untrustworthy.

What a pity that this manager did not understand that the opposite lesson was just as pertinent. By treating your workforce as if they are valuable, that is what they will become. Trust them and they will become trustworthy.

One of the greatest assumptions that we make in almost every walk of life is that we can make others work harder by offering them rewards.

There is a whole industry dedicated to the provision of rewards programmes for performance and almost every organisation on this planet in one way or another runs their business on the basis of providing rewards for performance.
 
Let’s be clear right here that the reward is something extra, something other than the wage that has been agreed as the going rate for the job.
 
Alfie Kohn in his book, “Punished By Rewards”, exposes the assumption that providing these rewards improves performance.

He shows us in detail in any number of different cases how wrong we are to believe this and shows just how destructive the practice of rewarding performance really is.
 
Without reading “Punished by Rewards” it may be difficult to appreciate Alfie’s point but let me give an example from the book.

Alfie tells us one story about a scheme sponsored by Pizza Hut in North America to encourage children to read.

He tells us that in order to encourage literacy, children were promised a pizza for every book that they read.

On the surface it sounds perfectly laudable until you examine the detail of what actually happened.
These children instead of being encouraged to read, now saw books as obstacles between themselves and a pizza, and that the obstacle had to be surmounted as quickly and with as little effort as possible.

Thus instead of finding joy in the act of reading, the books these children read were selected by them on the basis of how thin they were and the size of the typeface so that they could qualify for their free pizzas as quickly as possible.
 
As Alfie notes, instead of encouraging children to develop an interest in books, this programme produced “fat kids who couldn’t read.”
 
In the first five chapters of this book Alfie Kohn turns our understanding of what is accepted as a basic tenet of our management practice, on its head.

He does it with such startling logic that it is impossible not to get it, and although his history is principally in education his experience as a behaviourist means that the lessons he learned in the field of education are as surgically relevant wherever we find one set of people trying to make another set of people work harder.
 
He goes on to show us in a hundred different ways, through stories and example, how what we assumed was a way to get people to perform, actually has the completely opposite effect.
 
Alfie tells a brilliant story to illustrate the difference between intrinsic and extrinsic motivation, and the effect one has on the other, in the case of an old gentleman who lived on the route home outside a local school in America. The children had taken it upon themselves to stop outside his house to fire abuse at him, safe in the knowledge that he could not chase them.
 
But the old man had a plan.
 
One day he called to the children and asked them if they would come back the following day to abuse him again, if he paid them a dollar each.

The children were delighted and duly turned up the following day to earn their dollar, and spent the afternoon hurtling more abuse at the man.

The man waited until they had finished then apologised because he would only be able to pay them 50 cents for the same thing on the following day.

The children agreed that fifty cents would be OK so they returned the following day.

Again the old man waited until they had finished then apologised again, tomorrow he would only be able to give them 10 cents each.

At this the children turned up their noses and refused to abuse him any more.
 
The old man had taken something that these children were clearly enjoying and by rewarding them for doing it, he completely changed the way that they felt about what they were doing until they would not consider doing it unless they were paid.

By rewarding them with an extrinsic motivator, he had robbed them of their joy, their intrinsic motivator.
 
Alfie shows us how managers do this exact same thing to their workforces every time they attempt to influence performance by giving rewards.

But still they do it because they know of no other way to influence the performance of their workforces.

This is while the world is reeling under the current crisis caused by bankers who were blinded to the long term effects of their financial strategies by their short term pursuit of individual rewards.
 
If you don’t read this book you will be able to continue giving rewards for performance in the knowledge that what you are doing is improving the performance of your workforce.
 
If you consider reading this book, be prepared to discover that almost all of the things that you ever considered to be good management practice, are not.

Peter created the “Breaking the Mould” process to make his astonishing results available to clients in all industries, public and private, large and small. Once you have understood the simplicity of ‘Breaking the Mould’ – it will transform your life forever! Visit www.breakingthemould.co.uk.

For some time now I have, at intervals, come across the influence of this book and have never thought to look for the source or follow up the reference.

When I was given a copy of the book I glanced at the first two pages intending to put it on the shelf next to the growing pile of “management” books I keep there for a rainy day.

Two hours later I was making excuses about why everything else could wait until I had finished it.
I didn’t get the book finished in one sitting but at that first sitting I resolved to do what I could to bring this fifty year old wisdom back to the fore.

To say that Douglas McGregor was way ahead of his time is obvious, but to assume that his time has passed is just as wrong.

The Human Side of Enterprise shows us how to make more money by doing less work but, because it sounds too good to be true, we assume that it must be, and therefore disregard it.

When it was first published in the cynical sixties the book got a mixed reception, those who understood and practiced the McGregor philosophy were in the minority and those who were absolutely sure that the McGregor proposition could never happen were the huge majority.

I was neither but assumed that the cynics were right because I heard no other point of view.

What caught my eye first in the book was that this was the source of the Theory Y Management Strategy. Douglas McGregor characterised the current management practices as Theory X and in this book he proposed the antidote to the destruction caused by Theory X managers.

He called it “Theory Y”.

Initially this was going to be a simple review whose purpose was to bring to another generation the astonishing wisdom that McGregor had developed in coining the terms Theory X and Theory Y.
Unfortunately, after revealing the grace and power of this alternate theory of management practice, instead of acknowledging that this book was an epoch shattering piece of work and being content, it continues to become even more powerful with every turn of the page until it is almost impossible to write succinctly about the innovative thinking and wisdom of this book without running out of superlatives. You might want to read that sentence again.

Here is a selection of quotes culled from the pages. You might be forgiven for thinking that this is a book of quotes, it is not. It is simply so powerful that the quotes seem to leap off every page. They are as true today as they were when Douglas McGregor wrote “The Human Side of Enterprise” nearly fifty years ago.

“The effectiveness of organisations could be at least doubled if managers could discover how to tap into the unrealised potential present in their workforces.”

“The ingenuity of the average worker is sufficient to outwit any system of controls devised by management.”

“When people respond to managerial decisions in undesired ways the normal response is to blame them, rather than managements failure to select the appropriate means of control.”

“A half a century ago industrial management had, in the threat of unemployment, a form of punishment which made the use of authority relatively effective. The situation today is vastly different.”

“When the use of authority does not work don’t use less or more. Use another means of influence.”

“When objectives are externally imposed indifference or resistance are the most likely consequences.”

“It is one of the favourite pastimes of management to decide, from within their professional ivory tower, what help the field organisation needs and then to design and develop programs for meeting these needs. Then it becomes necessary to get the field organisation to accept the help provided.
This is normally the role of the Change Manager; to implement the change that no-one asked for or wants.”

The above quotes are all taken from the text of this book, written fifty years ago.

All of them could have been written yesterday and still be true.

This book heaves with the lessons that we should have learned fifty years ago.

–

Peter A Hunter is the author of the book Breaking the Mould and A Collection of True stories about what happens when ordinary people are allowed to become powerful. Visit his website at www.breakingthemould.co.uk.

This is the third article in a three part series on The Credit Crunch. Here are the links to parts 1 and 2 if you have not yet read them. 

Part 1: The Credit Crunch: Why it happened?

Part 2: The Credit Crunch: What can we learn

Since before the late 19th century we have been struggling to understand economics in such a way that like other sciences we can make predictions about what will happen when we apply a particular stimulus.
Countless higher degrees and PhDs have been awarded as we honed our collective understanding of economic cause and effect, but over a century since the beginning of the study of economics we have still not been able to come up with a definitive model that describes how our economy works.

This is nothing to be ashamed of.

We have been studying the weather for a lot longer than our economy and have only recently come to the conclusion that the processes that produce weather are chaotic. This means that while we may understand the physical processes that produce weather we do not have the ability to make predictions because the complexity of the weather generation processes defies prediction.

In the same way it would appear that the economy, while we have a broad understanding of cause and effect, because of its chaotic nature, also defies prediction.

What we are seeing now in the aftermath of the Credit Crunch are attempts to influence the economy by governments who are ploughing in billions of pounds or dollars, into systems to try to stimulate them without any clear understanding of the effect that their efforts at stimulation will have.

It is like watching someone trying to start a car by kicking the tyres.

In the sixties we were given two types of weather forecast, the short range forecast, for the coming week, and the long range forecast, for the next quarter. When the UK meteorological office in Bracknell got two super computers to make more accurate forecasts, the first thing that the computers told the forecasters was to stop making long range forecasts because the results were no better than chance.

History may be trying to tell us that our attempts to stimulate the economy have just as much chance of success as forecasters had at predicting the long range weather.

The economy, as does the weather, goes in cycles. In the seventies we were sure we were seeing the beginning of a new ice age and today we are predicting global warming with no less certainty. For the last fifteen years we have been experiencing steady growth in the global economy, and today we are in recession.

The difference between the weather and the economy is that we never thought that we could control the weather so it was quite easy to admit that we could not predict it beyond the three day forecasting service we currently enjoy. Economists have not yet reached that epiphany and believe that they do still have some degree of control over the economy.

The consequence of this difference of understanding is that economists continue to throw billions of public money at their problems while weather forecasters are content to make the short term forecasts that their understanding of chaos shows them is the best that they can expect.

Because the economy was in a state of stable growth for so long the perception appears to have become that this was the natural state of affairs and would continue for the foreseeable future. People working in the financial sector therefore traded on the expectation that this expansion would continue forever and therefore lost their ability to continue to trade when the other half of the cycle, recession, occurred.
Their businesses became tuned more and more finely to the conditions of a growth market and were no longer able to cope when the conditions of that market changed.

We can see the effect more dramatically if we use the world of formula one racing for an analogy. We have F1 cars that have been developed to run in a specific environment, the F1 race track, but outside of that environment they are completely useless. Take an F1 car down the high street and you will see what I mean. There is no room in the car for shopping, the traffic calming measures would tear the aerodynamic features off, a single raised drain cover would rip the bottom out of the engine, the car would overheat by going too slow and it would not be able to turn corners. In this situation would you spend more money to change the F1 car to try to make it cope with the high street conditions, or would you recognise that the design was fundamentally unsuitable, throw it away and start again?

In the economy we are facing a situation where our financial and other institutions have tuned their operations for a specific set of market conditions, growth. They have now shown that they are unable to cope with a different set of market conditions, recession.

We have two choices. We can continue to throw money at the problem in the vague hope that it might do some good, or we can admit that these institutions have evolved to service a specific market and are now no longer viable when those market conditions change.

If the latter do we, like the F1 car, keep patching it up with expensive solutions that don’t really solve the problem, or do we allow them to fail and replace them with something more robust?

What would be the cost of allowing the institutions who have evolved in this way to fail? Would it be more than the money that is currently being spent to try to save them?

–

Peter A Hunter is the author of the book Breaking the Mould  and A Collection of True stories about what happens when ordinary people are allowed to become powerful. Visit his website at www.breakingthemould.co.uk.

This is the second article in a three part series on The Credit Crunch. Here is the link to part 1 if you have not yet read it. 

Part 1: The Credit Crunch: Why it happened?

The efforts of these companies in the short term to reduce costs may be seen as a necessary evil but if they are not conducted in the correct manner then these companies run the risk of damaging their infrastructure to such an extent that they may not be able to recover even when the current pressure is removed.

A few years ago I was watching TV and I saw an interview with Rod Eddington, the then Chairman of British Airways. He was understandably complaining about the market share that he had lost to Ryanair, Easijet and the other budget airlines. But he was also being quite bullish about it.
He said that in the previous 3 years he had reduced British Airways operating costs by five percent.

What he didn’t say was that in those same three years he had made sixteen thousand of his staff redundant.

The question that I have to ask is, “How did the people who remained working at British Airways feel when they found out that sixteen thousand of their colleagues had been made redundant?”

Did they feel good about it? Did it make them feel secure? Did it increase their trust in BA? I don’t think so.

Three years later and the redundancies had changed the way the workforce felt about their jobs, from people who were proud and motivated to employees who just turned up for their pay.

This is the sort of change that occurs with monotonous regularity in industry.
A caring and productive workforce is changed into one that turns up for the pay check and has no other interest in being there.

When this happens the value of what is left of the company is considerably less than the sum of the parts.

At the end of the Cold War the armed forces were told that there would be a restructuring process. Everybody knew that this meant redundancies, we had won the war without a shot being fired and now it was time to stand down.
The powers that be would not admit that the reason for the restructuring was to make redundancies and when the redundancies came they acted as if they were truly surprised.

To the one hundred thousand or so men being made redundant this did not change the fact of their redundancies but it sent the clear message that the people who ran the Royal Navy, Air Force and Army were no longer people to be trusted and that there was no honour in continuing to serve them.

For their Lordships the way that redundant soldiers sailors and airmen felt was of no consequence because they were no longer on the strength.
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The year following the final tranche of redundancies the armed forces suddenly found that even at one third of their previous strength they could not recruit sufficient people to fill their requirement. That years recruiting was disastrous and only by spending a small fortune on advertising were they able to bring the numbers up to a level that sustained their new reduced strength.

What they had forgotten was that before anyone joins the services, or any company, they will look for someone who is already there and ask them what it is like to work there, and the story they hear is the story that they will believe.

The Armed Forces and British Airways all suffered the same fate. They lost the trust of their workforces.
By failing to take care of their personnel during the redundancies they turned their former employees against them and made it extremely difficult and expensive to recover from the position they had put themselves in.
The same thing will happen to organisations caught up in the current crisis.

By making redundancies to satisfy our short term need we can stack up a whole new set of problems for the future.

In most cases the difference between feeling discarded and feeling respected is no more than a kind word and a handshake but for many managers that is still too much for them to do,

This cautionary tale is for those managers. It is their organisations who will suffer when business resumes if they don’t take care of their people now.

This is the second article in a three part series on The Credit Crunch. Do not miss part 3.

Part 3: The Credit Crunch: Can we predict the future?

–

Peter A Hunter is the author of the book Breaking the Mould  and A Collection of True stories about what happens when ordinary people are allowed to become powerful. Visit his website at www.breakingthemould.co.uk.

We can see the effect in the failures of our financial and retail institutions but the question of why it happened, and what we can learn from it, seems less clear.

In December I was sent a link to a seminar given at Harvard University on the 25th September 2008 called “Understanding the Crisis in the Markets” in which a panel of experts from Harvard University did their best to get to the bottom of the problem.

The lecture lasts 90 minutes and can be seen in full at http://alumninews.harvard.edu

Presenting the seminar was a panel of six experts including Jay Light, the Dean of the University, Rob Kaplan, a Professor of Management Practice, Elizabeth Warren, a professor of Law, Greg Mankiw, a professor of Economics, Keneth Rogoff. a professor of Public Policy and Robert Merton. a winner of the Nobel Prize for Economics.

The genesis of the problem appears to revolve around a phenomenon called leveraging. Briefly, if I own my house then it has a value. I can realise that value by selling the house, but then I would not have anywhere to live, so I have to buy another house and have not really achieved anything. Or I can take out a loan against my house, then I will have somewhere to live, and the money. I have leveraged my house. As long as I am able to continue making the payments on the loan the system works.

The breakdown in the system, as described by the panel, started as early as 10 years ago in the United States when mortgage brokers became tired of the boring old system of carefully assessing people’s ability to repay mortgages and instead started to look for ways that they could make more money from their sale.

One of the ways they came up with was what was called a “teaser” rate in which the sale of a mortgage was assessed on the ability of the buyer to make payments on a low introductory rate which lasted typically two years, and not on their ability to pay the other 28 years of a 30 year mortgage, at double the teaser rate.

At the same time the mortgage companies were spreading their risk around other financial institutions by repackaging and selling their mortgage-loans to them. They were therefore less concerned about buyers defaulting on their loans when the higher rate kicked in because they were no longer lending their own money.

With more money available house prices started to increase and this led to the ratio of average house prices to average wages rising in America from something like 2.8:1 to over 4:1. In the UK that Ratio exceeded 6:1 as house prices rocketed and the mortgage companies looked for new ways to sell mortgages.

This was not sustainable in a flat market, but the world was in growth, corporate profits reached record margins, property prices were increasing and the market was being sustained, for a while.

Meanwhile wages were stagnant in real terms while living costs continued to rise, making it increasingly difficult for homeowners to make ends meet. For many the only way out was to take a second job. Then the homeowners discovered their ability to remortgage, or leverage, their homes to release their capital.

While property prices continued to increase this was fine because when the teaser rates on the remortgage ran out the property had increased in value sufficiently to remortgage again.
This release of capital masked the fact that middle class America was having an increasingly difficult time funding their lifestyles from their wages.

A point to note is that the perception of these “sub prime” mortgages is that they were supplied to the poorer sections of the community to get them on the housing ladder. In fact over 80% of these loans were remortgages sold to existing borrowers – the home owning American middle class.

Then house prices stopped rising.

Now when the teaser rates ended there was no more equity to be released and the homeowner was left with a huge debt and no way to pay it off.

In the meantime the mortgage companies, well aware of the problems they were stacking up, had spread the risk of their loans throughout the financial community by taking out loans on their loans, or leveraging, so that ownership of the mortgage was spread around in a very complex way that only works in an expanding market, or while the release of equity continues to fund expansion.

When the release of equity dried up nobody could afford to repay their loans. Not the house owners, nor the financial institutions.

The complex relationships of the world’s financial institutions and the global nature of their business has ensured that these effects are being felt around the world.

The discussion finished with questions from the floor, one of which suggested that the current crisis might be dwarfed if the problem of over leveraging is not solved before the next round of teaser mortgage rates expire.

The panel of six experts agreed that the answer was not going to be easy to find.

This is the first article in a three part series on The Credit Crunch. Do not miss part 2 and 3.

Part 2: The Credit Crunch: What can we learn

Part 3: The Credit Crunch: Can we predict the future?

–

Peter A Hunter is the author of the book Breaking the Mould  and A Collection of True stories about what happens when ordinary people are allowed to become powerful. Visit his website at www.breakingthemould.co.uk.

Instead of dealing with them and attempting to satisfy the customer we should be creating a process that makes complaining more difficult.

Then when customers complain they will get a huge negative experience and no satisfaction. This will make them think very hard before they complain again.

This approach is working already.

Fifteen Years ago I moved up to the West Coast of Scotland.

After three years of the Highlands I decided to make it my permanent home and settled down to live in the most beautiful imaginable spot on the shores of Loch Long.

In the mornings I would listen to the radio, gently smiling at the all the roads in England that were listed almost daily as the announcer plunged again and again through the litany of names that spelled delays and frustration for millions of trapped motorists.

I had previously lived in the South of England and one of the principal reasons for getting away was to avoid the frustrations caused by the daily movement of large numbers of people that were a permanent feature of living in this overcrowded corner of the country.

I felt quite smug to have escaped but several years ago cruel circumstance forced me back to within commuting distance of London.

The first thing I decided was that any trips to London would be on the train.

I had spent too long laughing at the travel news to believe that it would ever be possible to penetrate inside the orbital M25 in a car.

On my first trip to London I got a lift to the station. It was only fifteen minutes, then I stood on the platform waiting for the train.

There was a train due every fifteen minutes and after about ten minutes one arrived.

Travel time was to be an hour so I sat down to read some proofs.

As the train got closer to London it filled up until the announcer declared that the train was full and would not now stop until it arrived in London.

I have since discovered that this is the normal routine but at the time was heartened to hear what I thought was a sensible decision being taken.

The train was full but not uncomfortable in the same way that a full underground train is.

After a further ten minutes the announcer came on again to tell us that the train was broken and that instead of delivering us to our station of choice in London, it would now drop us on the outskirts from whence we would have to make our own way to town on the underground.

It took me a while, and a conversation with the man next to me, to decipher what the change meant to me in terms of connections etc. but having left an optimistic 45 minute buffer for my speaking engagement I worked out that I could cope with the extra delay.

Having settled my own mind I started to look at my fellow passengers and realised that when the announcement had been made there had been absolutely no reaction from any of them.
There was no hint of outrage, no gasp of resignation and no casting heavenwards of the eyes of despair.

No reaction at all!
I began to ask why that was.
Did the train break down every day?

That could explain the lack of reaction but it hardly seemed credible.
There had to be an expectation of some sort that caused this complete lack of response, and I thought that I could see what it was.

When we are given a stimulus we respond to it.
We are drawn towards warmth as we also avoid heat and cold.
Pavlov created an expectation of hunger in his dogs with the bell such that they salivated when it rang even when no food was present.

The lack of response that I saw on the train told me that the passenger’s expectation was that they were absolutely powerless to do anything about their situation and therefore there was no point wasting any energy on being indignant or concerned.

When the train stopped everybody got off and I followed as we descended into the tube station to continue our journey into London.
It was on the underground train that it suddenly occurred to me, what a lot of money we have been wasting on dealing with customer complaints.

If instead of dealing with complaints and attempting to satisfy the customer we instead create a process that makes complaining so difficult that when customers complain they get a huge negative experience and never receive any satisfaction, they will think very hard before they complain again.

Before long the expectation of the customers is that there is nothing to be gained by complaining and the whole of the resource that was dedicated to dealing with complaints can be reallocated to other more needy areas of the organisation.
Provision of nursery care for the children of employees and assisted study programs to retrain the personnel who used to work in the complaints department.

There would be a small staff kept on to deal with the complaints about why there was no complaints department but, using the same strategy, that too could be phased out in time.

The one requirement for the organisation considering this strategy would be a captive market.
So long as the customer did not have a choice I felt that I was on to a winner.

The more I thought about it the more I realised that all of the organisations for whom the prerequisite of a captive market already existed, had been running this system for years.
The power companies, banks, mortgage companies, local and transport authorities, utilities.

That is why the passengers on the train failed to react because these organisations have already created an expectation that complaining is pointless.

These same people will still react when their cheap no frills flight fails to turn up but that is simply because these airlines are relatively new in business and the public expectation that complaining is pointless has not yet been made.

These airlines are working hard at their complaints procedure. Soon the number of complaints they receive will begin to fall off too, as the public realise that nothing they do or say will make any difference to the level of service.

While they are still receiving complaints they have still got some way to go.

Give them time, they will soon catch up.

Peter created the ‚ÄúBreaking the Mould‚Äù process to make his astonishing results available to clients in all industries, public and private, large and small. Once you have understood the simplicity of ‘Breaking the Mould’ – it will transform your life forever! visit www.breakingthemould.co.uk.

This was good cattle country but it fell between the jurisdiction of the Scottish Kings and the English. Being too far away from either to be effectively governed or policed the inhabitants were left for much of the time to their own devices.

In this region there developed a sport peculiar to the time and the geography that was called rieving, an old Scottish word which translated means to rob or plunder.

The genesis of the sport is lost in time but its roots are firmly in the natural antipathy the Scots borderers felt for the English and vice versa.

The young men of the time, lacking the diversion of the playstation, the educational value of the internet, or the speed of a dropped Vauxhall Corsa, would take it upon themselves to visit their English or Scottish neighbours and make off with anything they found, generally this was their neighbours’ cattle which were valuable, easily transported and usually located at some distance from their neighbours’ stronghold.

The sport was then heightened by the perils of the return journey encumbered by cattle which, if they were caught, would certainly spell their guilt.

The theft of cattle would clearly not go unnoticed and depending on the situation a reprisal raid would not be long in the planning and would take place in what we might today refer to as a “return match”.

The problem was that having stolen their neighbour’s cattle the home team could reasonably expect some sort of return visit and would therefore be on their guard. Thus the stakes were raised.

The return visit would be planned with even more care and even more support than the original raid. This was where the clans became useful, an affront to one member of the clan was an affront to all and there were no shortage of volunteers or intelligence when the return match was held.

Since the extended family, or clan, system was common on both sides of the border the home team stood a very good chance of becoming aware of the exact date and time of the return visit and the members of the clan would lie in wait for the rievers, not as they arrived, innocent of anything but the desire for a long walk, but when they were returning with the proceeds of their afternoon’s sport, were obviously guilty and could therefore be mishandled with impunity in the ensuing melee.

As a descendant of an old West Coast Family I am sometimes asked about this history and have to admit that my ancestors were active participants in this sport, though not very proficient since one of them was red carded and hung by the neck in Peebles in 1543 for what was probably just a misunderstanding of the offside rule.

Last month we played host to a couple from Peru into whose company we had been thrust for three days last year while Iberia Airlines, from whom we had innocently bought tickets to Peru, worked out how to get us from Heathrow to Lima via Madrid and Amsterdam, apparently without an aeroplane.

During this couple’s stay at our house in Cranfield, UK, the subject of family history came up and we told our guests this story of the Border Rievers.

Their English is better than our Spanish so we told the story in English and were a little disappointed at the rather puzzled reaction that we got to our tales of 16th century derring-do in the heather of the borders.

An uncomfortable silence descended, broken when one of our Peruvian visitors asked ‚ÄúWhy would they steal each other’s kettles?‚Äù

He said that he was a trout farmer and that we had found his farm.
He said he had to come this far up the river because lower down the water was too dirty for the fish.
Here the temperature was perfect for the growing fish and he showed us how he had diverted part of the flow of the river through a series of pools stocked with everything from 2 inch babies at the bottom to half metre long monsters in the top pool.
He explained that the water never became cold enough for the trout to breed in the river but the fertilised eggs, brought in from the United States, were released into the Rimac where the trout’s prodigious growth commenced.

Raoul explained that, as in most trout farms, the fish in each pool were fed by hand with food pellets thrown from the side of the pool.
The fish that caught the most food grew the fastest and were then caught and moved up the ladder to the larger pools.
Fish that grew slower still moved up the ladder towards the larger pools but at a slower rate.
The fish that grew the least were left at the bottom and ultimately, if they did not put on any weight, were fed to those at the top.

While walking through the mountains it was quickly obvious who the top predator in the area was. Almost every valley had its resident eagle. They could be seen patrolling the length of the valley or roosting high up on the mountainside keeping a careful eye on their domain.

It occurred to us to ask Raoul if he lost many fish to the eagles, who must surely be aware of such a concentration of tasty snacks right under their beaks.

Raoul laughed at that, he said that he did not.
The pools were deep enough so that the trout, as soon as they spied the shape of an approaching eagle, could hide at the bottom, out of reach.

“They are not stupid.”
“But” he said, “There was one eagle that had caused him a problem”.
When the farm had first been set up there was a lot of work to do and he had not been able to keep as close a watch on the ponds as he was able to do now.
At first it was just a suspicion, then he began to keep a more careful note of the numbers and became convinced that something was taking his fish.
It could be either a puma or the eagles but since there were no tracks he guessed that it must be an eagle.

He hid in his hut and watched the river through the open window.

It was not long before his patience was rewarded and he saw a large eagle land next to the pools. The eagle looked around and, seeing no one, proceeded to inspect the water, walking carefully around each pool, finally selecting the second pool from the top in which the trout were a good size but not big enough to pull him in.
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Raoul was not concerned because the eagle had made no attempt to hide itself.
He knew that his fish, having seen him, must all be safe at the bottom of the pool.

Then the eagle turned around, presented his backside to the pool, and relieved himself into the water.

The trout, who had indeed been lying in the bottom of the pool, rose with a surge to get what they had assumed to be food as it splashed into the pool.
The eagle turned around casually and catching the first trout by its head, flung it over his shoulder then, with a hop, took it in his claws and was airborne.

It all happened so fast that Raoul simply watched them go.

That fish was a good meal, then the following day Raoul noticed the eagle again, once more patrolling the valley in search of food.
Again he hid in his hut, but this time with a loaded rifle in his hand.

The magnificent creature circled for a while then coming in low from behind Raoul’s hut, landed lightly next to the second pool from the top.
As it turned to present its backside to the pool it was momentarily in profile and Raoul shot it through the neck.
In the ultimate irony he fed the carcass to his fish.

We all laughed but the story showed us, you can be too smart.