Why Economies of Scale Lead to Poor Service

As the government embarks on programmes of shared services, let me give an example of why this approach can be disastrous. At the local school where I am Chair of Governors we have just gone through BSF (Building Schools for the Future). We were promised the economies of scale would result in better service and lower prices. In fact they have led to the reverse.

Lessons of BSF
Let's take the example of IT support. Before BSF we had a team of four staff, who had taken the school to a leading position in the use of IT in education. They were directly managed by the school and any problems could be dealt with directly.

Now we have an external firm managing it. But we don't have a direct contract with them. They have a contract with the lead contractor. The lead contractor has a contract with the Local Education Partnership (LEP). The LEP has a contract with the local council. And the local council has a contract with the school.

In the first year the service was terrible, so bad that penalty payments sometimes exceeded 50% of contract value. Previously we could have dealt with this through performance management. If we had simply employed an IT support firm, with a sensible contract, we could have simply terminated and found another provider. But a distance of four complex contracts and a first contract break point of five years, there was very little we could do. Economies of scale had resulted not in better service but in a complex, costly service over which we had little power as customer.

Now BSF is well known for its costly, centralised legalistic approach. Anybody involved will tell you how it wasted billions of public money. But the shared services approach is set to follow a similar route.

Shared Services in Training
Take my business of training. In most of our contracts we have a direct relationship with clients. If they are not happy they can simply choose somebody else (though this rarely, if ever, happens). Under shared services, the client will have a contract with the service purchaser, who will have a contract with the main contractor, who will have a contract with the training provider. And it will be a long-term contract, to justify the complexity of the procurement.

Rather than getting economies of scale, we can expect to get complex contract relationships (which raise costs) and only indirect control over quality. Once again the lawyers will do very well, but the government clients probably won't.

Why Economies of Scale Can Lead to Higher Prices

Once again we have a government talking about saving money through shared services and combined procurement. It seems to make sense. If you buy 100, say, televisions you would expect to be able to negotiate a better price than if you only bought one. The same must be true for when the government buys services, mustn't it?

Actually the answer is often no. Let's look at my industry, training delivery. Parts of central government are now talking about combining all their training spend - for IT, management, health and safety and much more - across many departments. To bid you will have to be a truly massive company, the likes of Capita or Serco - and they certainly won't be as cheap as buying direct from a training provider. And control of quality will be fair more indirect.

For a government agency in, say Exeter, the best value training would probably be sourced from the local college or a small local provider. But neither of these will bid for a national contract. By making the contract so large, the competition is cut down to a small number of big companies who are rarely either best for value or best for quality.

Small Companies Can Provide Better Value and More Flexibility
One agency I know, after a full procurement some years ago, hired a one person company to provide their IT training. They provided the best value, most flexible, most responsive service I have come across anywhere outside of my company. (I know about it because Happy Computers was the back-up provider, for any courses he couldn't train.) But he certainly couldn't bid for any national contract and the large providers would have little reason to include him.

At the same time as going for larger procurement contracts, the government talks of including more small businesses - apparently unaware of the obvious contradiction. I've heard government representatives talk of how small businesses can be included as sub-contractors to the big bidders.

But this is a profoundly stupid approach. The benefit of contracting with small firms is better value and greater flexibility. You lose both by only contracting these companies as part of large contracts.

If the government goes ahead with its determination to centralise procurement you can expect some very complex legal contracts (yes, the one set of people who will definitely benefit are the lawyers), less direct contact with the providers and a far more bureaucratic approach. What you almost certainly won't get is lower cost.

The Happy Manifesto: 9 Steps to a Great Workplace

The latest draft (beta 1.6) of the Happy Manifesto can be downloaded from here. Here is the manifesto, the key 9 points:

1. Trust Your People
Step out of approval. Instead pre-approve and focus on supporting your people.

2. Make Your People Feel Good
Make this the focus of management

3. Give Freedom within Clear Guidelines
People want to know what is expected of them. But they want freedom to find the best way to achieve their goals..

4. Be Open and Transparent
More information means more people can take responsibility

5. Recruit for Attitude, Train for Skill

6. Celebrate Mistakes
Create a truly no-blame culture

7. Community: Create Mutual Benefit
Have a positive impact on the world and build your organisation too

8. Love Work, Get a Life
The world, and your job, needs you well rested, well nourished and well supported.

9. Select Managers Who are Good at Managing
Make sure your people are supported by somebody who is good at doing that, and find other routes for those whose strengths are elsewhere. Even better, allow people to choose their managers.

Thoughts, comments, feedback, additional suggestions welcome.

Is the Government Serious About Supporting Small Business?

I'm not a great fan of the coalition government but it was great to hear David Cameron talking about the role of small business. Personally I have always thought the complaints about red tape were so much hot air but he is spot on when he talks about "the shocking way in which small and medium sized firms are locked out of procurement opportunities by central and local government".

This makes sense. Small businesses can often provider more flexibility, better value and a more local approach.

But does Cameron mean it? Since June the only trend I have seen is to larger contracts aimed at the largest suppliers. I have just written to Cameron to ask if he will reverse the move of the Skills Funding Agency to minimum contract values for apprenticeships. From 2012 they say they will only sign annual contracts of £1 million or more. Clearly they have no wish to work with small business.

Here's my letter. I will post any reply I receive:

David Cameron
Prime Minister
10 Downing Street
London
SW1A 2AA
3rd November 2010

Dear Mr Cameron

As a small business owner can I say how delighted I was to see your statements this week on supporting small business, especially in giving us a fair chance in government procurement. As a training business that provides extensive services to government, I hugely welcome your proposals.

Let me make you aware of one place where the government has, since June, introduced changes that appear to be designed to prevent a government agency contracting directly with small businesses. I write in the hope that you will be able to stop it

The Skills Funding Agency is introducing new minimum annual contract values for delivery of apprenticeships. Last year Happy Computers, as a small business, had a contract for £170,000 which enables us to deliver excellent training and certification to around 75 apprenticeships. This year a minimum contract value of £250,000 has been introduced. Next year this is to be raised to £500,000 and, we are told, the year after it will become £1 million.

At the moment a small local business may be the best provider to meet the needs of the local community and may only have demand for around 20 apprenticeships. In the future small businesses like this, and like ourselves, will not be allowed to contract directly with the Skills Funding Agency.

Instead small businesses will have to sub-contract through larger training providers. This will introduce an extra layer, mean more non-delivery work and will mean a % top sliced away.

This would only make sense if the government believed the way to improve services was to use only large organisations. It makes no sense for a government committed to small businesses, entrepreneurship and innovation.

Yours

Henry Stewart
Chief Executive
Happy Ltd

Assess Learning not Teaching

This morning I took part in a trial Ofsted at the secondary school where I am a governor. The inspector commented that, in assessing teachers, the focus needed to be more on learning than teaching.

I like that approach. Changing the focus from whether the teacher has carried out the 15 different tasks on the checklist, to the quality of the learning that is taking place has the potential to transform the classroom.

Learner Focused Training
It is similar to the change that Happy Computers went through around 8 years ago. Challenged by the Institute of IT Training on whether we were focused more on course objectives or personal objectives, we developed a new approach. We called it Learner Focused Training.

Most trainers go into the classroom focused on the set objectives to be achieved and the material to be covered. Instead be guided by these objectives but flexible to the needs of the individuals. Always remember that your role is to help your learners be more effective in their job, which is much more important than what material has been covered.

A Change in Direction
So stop assessing what the teacher or trainer is doing. And instead assess the learning that they are enabling. Look more at what the students are doing than what the teacher is. I look forward to the effect this change in approach could have.

Five Steps to Great Service

I've just been brainstorming with a colleague who is teaching a 50 minute Active Listening course tomorrow. It brought to mind a great story from "Influencer" by Kerry Patterson et al - a book I strongly recommend. It is about a regional hospital in the US where feedback was that families didn't feel treated with care, dignity and respect.

The core message of Influencer is to find "positive deviance". This is to identify where people are successful, identify what are their key behaviours and copy them. In this case they identified 5 specific actions:

1 Smile
2 Establish eye contact
3 Identify yourself
4 Let people know what you are doing and why
5 End every interaction by asking "is there anything else that you need?"

None of this is rocket science and none of it is about medical expertise. They are simple behaviours that make people's experience better. But relentlessly pursuing them resulted in dramatic improvements in customer feedback and the centre becoming best-in-class among its peers within a year of the new focus.

What simple steps can you and your people take to ensure your customers feel appreciated?

Employees First, Customers Second

That is the core philosophy of HCL Technologies and the title of the new book by its CEO, Vineet Nayar. It is a title very similar to one of the key books that influenced Happy Ltd from its earliest days: The Customer Comes Second by Hal Rosenbluth.

HCL is one of the leading Indian IT out-sourcing companies and employs 55,000 people. He took over as CEO in 2005, when he felt HCL was slipping - only growing at 30% a year! He used the philosophy of Employees First, Customers Second (EFCS) to radically change the culture, empower the staff and deliberately reduce the power of managers and of himself. Some examples:

Transparency: HCL introduced full transparancy of the performance of every unit in the company. Seeing their benchmarks, and being able to compare their performance with others, increased shared learning and provided powerful incentives to improve.

Internal Service Tickets: Most IT support companies have external service desks, with tickets and response times. HCL introduced this for all internal services, like HR or finance. The effect was to reduce the involvement of managers (who'd previously been called on to get another dept to respond) and improve response. especially when the target became not quick response times but reduced tickets.

Beyond 360 Degree Evaluation: Most big companies now get managers to be evaluated by peers and by some of those they manage. HCL's innovation was to open this up, so you could evaluate anybody in the company that you came into contact with. As well as the widespread feedback, the unexpected result was that managers began to be judged by how responses they received. It became a measure of their circle of influence.

Sharing CEO Problems: I love this idea. Vineet decided to create a portal to share the problems he was having difficulty solving as CEO and the challenges he saw for the company. He involved the whole company in understanding his role, the big picture and in coming up with solutions.

Employee Passion: HCL decided to survey not just employee satisfaction (for which the company was ranked no. 1 in India in 2009) but also their passion, and to share the results. People got to think about what drove them to act passionately and how they could best leveredge this at work.

Employee First Councils: To get people to embed their passion, Employee First Councils were created. Initially on subjects like health and hygiene, art etc but were extended to core work areas. Now there are 2,500 Councils - each with elected leaders driving forward change throughout the company and, as Vineet explains, pushing control away from the office of the CEO and the conventional hierarchy.

Customer-Employee Value portal: This portal is for employees to put forward ideas, which custoemrs then read and feedback on - leading directly to improved ideas and improved service.

Make all manager plans public: Previously the 300 most senior managers had prepared their plans for the next level up. Instead HCL published them all to all staff in the MyBlueprint portal, so they could see and compare them. As well as increasing transparency, Vineet comments that it led to much more work being put into getting the plans right.

Thriving in Difficult Times: Faced with the challenge of the 2008, and seeking to avoid wholesale layoffs, HCL reached out and asked its people how they should respond. From the massive response, the HCL management drew up 15 initiatives which were to result in "huge" cost savings and enabled the company to continue to grow. When Vineet asked their customers why they thought this had happened, they responded: "Your employees made the magic happen".

And it was the Employees First, Customers Second philosophy that made this possible. Indeed one impressive aspect of the story is the way the philosophy is shared with customers - explainign to them why HCL puts its philosophy first. Rather than putting off customers, it has actually led to many adopting some of the same ideas.

When I tell the Happy story, people often ask if the ideas of trust and freedom for staff would work in a large company. HCL is another example of how these kind of ideas work brilliantly in the largest of enterprises.

Why Presentations Must be Inter-Active

I liked this from Seth Godin's Tribes:

People don't believe what you tell them
They rarely believe what you show them
They often believe what their friends tell them
They always believe what they tell themselves

For Seth this means that leaders must give people stories, that tehir people can tell themselves, rather than directions. True but also it emphasises that any presentation must include involvement. The more you get the chance to talk (and tell yourselves) or discuss, and have your friends and colleagues tell you, the more chance there is of affecting attitudes and beliefs.

Anybody who just stands at the front and tells people things (even with nice graphics) is not going to have much effect on beliefs and attitudes.

Download Free Book: The Happy Manifesto

The second Happy book is almost finished. The first book, Relax, was a business fable about how to create a great workplace. It got some great reviews. The Happy Manifesto is based on the real experience of Happy and many other organisations.

The aim is to enable you to pick up ideas and approaches that you can put into practice to make your workplace great. Now.

Download The Happy Manifesto, free

This is a beta version. I want your feedback. I want to know what you like and where you think it could be improved. But, above all, I'd love to have stories from your workplace that illustrate any of the points in the book.

So please download it now. Read it. And send me your comments and suggestions.

To download a copy of the first book, Relax, click here.

"Everyone is a Winner" is the Way Forward for Business

Schools in the UK are often criticised for seeking to reward and praise all students. The common criticism is that there shold be winners and losers, and that only a few exceptional students should be rewarded.

Now research reported this week by Fortune magazine reveals that the "Everyone is a Winner" approach is the one that works best in business. Boston-based Globoforce found that widely spread rewards work much better than rewarding only the very top performers.

And the remarkable thing is that rewards so not have to be huge to be effective. The average prize, they suggest, should be just $110 (£72). Small rewards given often, ideally reaching 80-90% of staff over the year, are what gets the best results.

I love findings like this, that show once again that treating all people well is the way to create the most effective companies. And that the big bonus culture of the banks and financial sector does not really make sense.

Most Admired Company in the UK?

Fortune magazine reveals that the two most admired companies in the US are Apple and Google. Both are innovative and inspirational businesses, with great workplaces and great products.

But the most admired company in the UK, chosen from a survey of executives, directors and analysts, is apparently none other than British American Tobacco (BAT). I couldn't believe that when I first read it. The most admired company in the UK in the corporate world is a business whose products create addiction and kill its customers.

The choice was limited to large businesses but even then there are many UK businesses doing great things: Waitrose and the John Lewis Partnership; Marks and Spencers; Co-operative Bank would all be on my list.

Now BAT has tried to clean up its image. But doing odd bits for the community or the environment cannot make up for the deadly effect of its cigarettes - and the fact it continues to seek to increase sales of and addiction to that product, especially in the third world.

Around twelve years ago, when British American Tobacco was first trying to improve its image, it approached one of the big 5 UK consultancies about employing them to help BAT with its corporate social responsibility. That consultancy responded that it would be delighted to help, provided BAT dropped its main product. They of course weren't prepared to do that and the consultancy, to its eternal credit, showed them the door. If only the whole of the corporate world, and the social responsibility movement, had the same attitude.

Let People Choose their Managers

The role of managers is to help people perform at their best. Their job is to support, coach and challenge. We all know from personal experience that some managers are great at this, and that others aren't.

Bad management undermines morale, creates stress, reduces productivity and causes companies to lose some of their best people. A massive problem but there is a simple solution: Let people choose their managers. If they don't like the one they've got now, let them decide who they want instead.

Check out some of the research: There is the recent study from CMI that found that 47% of respondents left their last role because they were badly managed. There is the recent US survey that found that employees spend 19 hours a week (13 at work, 6 at home) worrying about "what a boss says or does". And there is the CIPD Employee Outlook report that found employee satisfaction in the UK at an all time low.

People see their manager as very important to them. The CMI study found that 49% would be prepared to take a pay cut if it meant working with a better manager.

Choose Your Manager
At some of the best companies to work for, that simply isn't necessary. At Gore (makers of Gore-Tex) staff (or partners as they call themselves) can choose their manager from anybody in the company. At my company, Happy, you can choose your 'co-ordinator' and change them if you would prefer somebody else.

When, at a recent awards ceremony, the host mentioned that at Happy people chose their managers the audience interrupted into a spontaneous round of applause. People know it makes sense. People can see that it would make their lives better, and more productive, if they could choose the right manager for them.

To put this into practice, there may need to be some changes in organisation. Most managers play a dual role. On the one hand they are responsible for strategy and decision-making. On the other they provide the support and challenge to people. Split those two roles (because they need very different skill-sets) and it becomes possible to let people choose their manager.

Please don't read this and forget it. Spread the idea. Let's end the archaic idea that the company knows what's best for you and should decide who manages you. Let people decide for themselves.

Watch this space. I will be blogging with more ideas, more explanations and more examples of this in practice.

Promise less than you can deliver

I was reminded of this important principle as my son was taken into surgery to have his appendix removed this week. I noticed a woman getting annoyed with the hospital staff and chatted to her about what was wrong. She had been told her husband's operaton would only take 30 minutes and it had been 90 minutes now. She was very worried.

We've had four surgeries in our family in the last three years. All have gone well but, in each case, it has been a lot longer than we were told before the person returns from the operation. Every time we've worried that something has gone wrong.

I think two things are happening. First, we are given a best case estimate because the surgeon wants to reassure us now. Second we are given the time from the surgeon's perspective, not that of the customer - we have to wait for the patient to come round from the anaesthetic before we see them.

Make them feel good after the service, not now
We are all tempted to do it: "It will only take 5 minutes", "We will have the report with you by the end of the day". But reassurance now leads to frustration later, if we can't deliver on it. It is always best to under-promise.

If you are in an aeroplane waiting to take off and the pilot tells you it will be a 45 minutes wait, but it turns out to be 35 minutes - you feel pleased, and you feel the pilot has delivered on his promise. But if she says 15 minutes and it turns out to be 25, you feel frustrated and let down.

I changed the local taxi firm we used when I found one that would actually you how long the taxi would be, instead of always saying "Its just round the corner". And I again remind myself to do the same, to make a promise I can take a delight in beating.

My son is doing fine by the way, touch wood (though he was late, of course, back from the operation). And the Royal London (an NHS hospital in East London) is just marvellous - friendly, helpful, responsive, informed.

Recent Press on Happy

The word about our workplace is spreading. Here's some recent articles and blogs:

Forster & Kreuz: Das Geheimnis erfolgriecher Firmen
No idea what this one says. The google translation is weird!

Independent: Even poets have been cited
Roger Trapp was the first journalist to write about Happy, back in 1996

Thinkers 50 Video: Henry Stewart Interview
My best attempt at capturing our beliefs in 15 minutes.

Calcalist Israel: On transparent salaries
Google translate gives a good sense of thsi one, if your Hebrew isn't strong!

Indian Economic Times: Management's motive should be to nurture people
A piece by me on what management can be like if it was people-focused.

MIT Sloan Management Review: What is your management model?
Interesting piece on Happy and others.

Forbes India: Virgin would never hire Branson
Actually my quote says the opposite of the title but never mind.

Enjoy! Thoughts welcome

Henry

The Servant Leadership Approach

At Happy we've worked a lot with the UK Greenleaf Centre for Servant Leadership. The idea of the leader as one who serves others provides a great perspective. This story (moast recently posted by Phil Johnson in LinkedIn) is a great leadership tale:

A legend tells of a French monastery known throughout Europe for the extraordinary leadership of a man known only as Brother Leo. Several monks began a pilgrimage to visit Brother Leo to learn from him. Almost immediately, they began to bicker about who should do various chores.

On the third day they met another monk going to the monastery, and he joined them. This monk never complained or shirked a duty, and whenever the others would fight over a chore, he would gracefully volunteer and do it himself. By the last day, the others were following his example, and from then on they worked together smoothly.

When they reached the monastery and asked to see Brother Leo, the man who greeted them laughed. "But our brother is among you!" And he pointed to the fellow who had joined them.

Today, many people seek leadership positions, not so much for what they can do for others but for what the position can do for them: status, connections, perks, advantages. They do service as an investment, a way to build an impressive resume.

The parable about Brother Leo teaches another model of leadership, where leaders are preoccupied with serving rather than being followed, with giving rather than getting, with doing rather than demanding. Leadership based on example, not command. This is called servant leadership.

Can you imagine how much better things would be if more politicians, educators, and business executives saw themselves as servant leaders?

Science says Don't Give Bonuses to Bankers

Just back from Daniel Pink, who was speaking at the Wired breakfast at RIBA this morning about his new book Drive. The key message is that short-term financial rewards, like the banker bonuses, do not produce great performance.

The science on this is clear, he explained. The carrot and stick approach may have worked in 1850s management: As Dan Ariely explains in the March 2010 issue of Wired UK, "Bonuses can boost activity, but not the quality of the work."

One example is the candle experiment. People are given a candle, matches and a box full of tacks and are asked to fix the candle to the wall. The secret is to empty the box, pin it to the wall and put the candle in the box. This became interesting when experimenters offered rewards of 5% for being in the fastest 25% and $20 for being the best.

Those in the incentivised group took, on average, 3.5 minutes longer to solve the problem. The reward actually increased their 'functional fixedness' and got in the way of creative approaches.

Pink explained that studies of companies show that cultures based on high short-term bonuses result in poor long-term performance. Instead companies need to build intrinsic motivation based on:

Autonomy - Search for Mastery - Purpose

Contrast Microsoft's failure with its Encarta encyclopedia (Encarta is now just a dictionary and thesaurus) with the success of Wikipedia. Microsoft paid its contributors well and hired managers to ensure delivery on time. But it is Wikipedia, with its editors contributing for free on topics they are passionate about, that has become the encyclopedia of our age.

This is true of Open Source generally and the success of Linux, Apache and more. Pink emphasised the importance of feedback. Many of the programmers who get involved in these projects probably only get feedback once a year or so in their main jobs, at their annual appraisal. But in the Open Source world they get regular feedback and can build a real reputation purely on the quality of their work.

"Motivation is not something you can do to somebody else", explained Dan. The message is that to get the best results -instead of bonuses - give people control over the work, a sense of purpose and a chance to learn and develop. Could be straight out of the Happy Manifesto.

Great Workplaces lead to Commercial Success: The Evidence

I've been asked to write a piece for the Journal of Direct Marketing on whether there is evidence of there being a link between having a great workplace and growth and profits. This is some of what I found:

Research into the companies that appear in the best workplaces indicates there really is a close link between a great work environment and commercial success. An investment in April 2001 of £100 in the 23 publicly quoted companies in the 2006 UK rankings would have been worth £166 by 2006, compared with £132 invested in the FTSE All Share Cumulative or £125 invested in the FTSE 100. (Financial Times, May 18, 2006).

This was backed up by a Gallup 2006 study, of 89 organisations, which found that earnings per share (EPS) growth of organisations with engagement scores in the top 25% was 2.6 times that of organisations with below-average engagement scores.

The 2009 Macleod report to government, “Engaging for Success”, found a wide range of evidence indicating a direct link between employee engagement and business results. They defined an engaged employee as one who “experiences a blend of job satisfaction, organisational commitment, job involvement and feelings of empowerment”.Gallup’s research has identified 12 core elements of employee engagement that they believe predict performance. These range from knowing what is expected of you to having the opportunity to do what you do best, every day, having a supervisor who seems to care about you and staff feeling their opinions count.

• The Gallup 2006 study, of 23,910 business units, compared the results from those in the top 25% of engagement with those in the bottom 25%.
• Those with engagement scores in the bottom quartile averaged 31 – 51 per cent more employee turnover, 51 per cent more inventory shrinkage and 62 per cent more accidents.
• Those with engagement scores in the top quartile averaged 12 per cent higher customer advocacy, 18 per cent higher productivity and 12 per cent higher profitability.
  (Gallup, 2006)

MacLeod also quotes a global survey from HR consultancy Tower Perrins in 2006, based on surveys of over 600,000 staff in a wide range of industries. “Companies with high levels of employee engagement improved 19.2 per cent in operating income while companies with low levels of employee engagement declined 32.7 percent over the study period.”

One of the strongest correlations was in the area of innovation. “Fifty-nine per cent of engaged employees say that their job brings out their most creative ideas against only three per cent of disengaged employees."

Of course it could be the case that a strongly performing company leads to strong engagement, rather than vice versa. Marcus Buckingham, previously of Gallup and now behind the Strengthfinder approach, “concludes from various longitudinal studies that it is engagement that leads to performance, and this is a four times stronger relationship than performance leading to engagement. (Macleod Review 2009)

There are a range of clear benefits from engaged staff:

• 70% of engaged employees indicate they have a good understanding of how to meet customer needs; only 17 per cent of non-engaged employees say the same. (CIPD 2006)
• Engaged employees are 87 per cent less likely to leave the organisation than the disengaged. (Corporate Leadership Council 2004)
• 78% of engaged employees would recommend their company’s products of services, against 13 per cent of the disengaged (Gallup 2003).

Many of the best companies in the world know this. Microsoft and Google, for instance, have made creating a great workplace one of their key strategic priorities. They know it makes them more effective, more innovative and also more attractive to potential employees.