Reinventing Management

Smarter Choices for Getting Work Done

Julian Birkinshaw

• Publisher: Jossey-Bass
• Year: 2010
• ISBN:
  9780470662311
• Edition: 1
• Topic: Business
• Subtopic: Management
• Index: Business

The recent economic crisis was not just caused by a failure of regulation or economic policy; it was a story of the failure of management in a fundamental sense—a deeply flawed approach to management that encouraged bankers to pursue opportunities without regard for their long-term consequences, and to put their own interests ahead of those of their employers and their shareholders.

And looking more widely, there is a creeping disenchantment with management as a profession: surveys show that managers generate less respect than lawyers and bankers in the eyes of the general public, and there are few if any positive role models for management.

"Change isn't just for the rank-and-file anymore; it's coming for you. Instant access to information and global resources have changed the world we live and work in. Julian Birkinshaw shows that 19 th century industrial management won't work in a 21 st century fluid workplace. Read this, or prepare to be 'game-changed' by someone who has."
— Jack Hughes, CEO, TopCoder

"Technological and social changes are having an enormous impact on the world of business, and on the way companies are managed. In this book, Julian Birkinshaw provides a roadmap for making sense of how the world of management is changing, and he provides useful advice for companies who want to harness the potential that Web 2.0 has to offer."
— PV Kannan, CEO, 24/7 Customer

"Julian Birkinshaw helps us look beyond our legacy management practices, and imagine bold new ways of leading, managing and organizing. Filled with mind-expanding examples, Reinventing Management is a must read for managers who want to build an organization that's truly fit for the future."
— Gary Hamel, bestselling author of The Future of Management

1

WHY MANAGEMENT FAILED

The investment banking industry officially ceased to exist on September 21, 2008. That was the day the last two remaining investment banks, Goldman Sachs and Morgan Stanley, converted themselves into deposit-taking commercial banks. With Lehman Brothers filing for bankruptcy a week earlier, Merrill Lynch sold to Bank of America the same week, and Bear Stearns sold to JP Morgan back in March 2008, the independent broker-dealer investment bank was no more.

Many books and articles have now been written to explain the causes of the credit crisis of 2007-2008 and the broader upheaval in the financial services industry that followed. We know there was a failure of regulation, a failure of macro-economic policy, perhaps even a failure in the way our entire market system worked. And all institutions involved in the financial services sector—ratings agencies, regulators, central bankers, as well as law firms, accountants, and business schools—have taken their share of the blame. But what has attracted far less attention so far is that the demise of traditional investment banking was also a spectacular failure of management.

Of course, it goes without saying that when a company fails, the CEO takes responsibility for that failure. The likes of Stan O’Neal (Merrill Lynch), Chuck Prince (Citibank), and Peter Wulfli (UBS) were rightly dismissed when the scale of the problems in their respective organizations became known, and Dick Fuld will rightly be viewed as the architect of Lehman Brothers’ impressive rise and dramatic fall.

But this “failure of management” in investment banking is far more than the story of a few CEOs losing control of their organizations; it is the story of a deeply flawed model of management that encouraged bankers to pursue opportunities without regard for their long-term consequences, and to put their own interests ahead of those of their employers and their shareholders. And it’s a story we see played out in similar ways in companies around the world that are all suffering from a failure of management.

Lehman Brothers’ Demise

Consider Lehman Brothers (Lehman), perhaps the institution where the greatest amount of value was destroyed in the shortest period of time. Since 1993, Lehman had been led by Dick Fuld, a legendary figure on Wall Street, and a “textbook example of the command and control CEO.”¹ Fuld inspired great loyalty in his management team, but his style was aggressive and intimidating. In the words of a former employee, “His style contained the seeds of disaster. It meant that nobody would or could challenge the boss if his judgment erred or if things started to go wrong.”

And things did go wrong. The company made a record $4.2 billion profit in 2007, but it had done so by chasing low-margin, high-risk business without the necessary levels of capital. When the sub-prime crisis hit, Lehman found itself exposed and vulnerable. Fuld explored the possibility of a merger with several deep-pocketed competitors, but he refused to accept the low valuation they were offering him. And on September 15, 2008, the company filed for bankruptcy.

What were the underlying causes of Lehman’s failure? While Dick Fuld’s take-no-prisoners management style certainly didn’t help their cause, we need to dig into the company’s underlying Management Model to understand what happened. Contributory factors included:

• Its risk management was poor. Like most of its competitors, Lehman failed to understand the risk associated with an entire class of mortgage-backed securities. But more importantly, no one felt accountable for the risks they were taking on these products. By falling back on formal rules rather than careful use of personal judgment to take into account the changing situation, Lehman made many bad decisions.

• It had perverse incentive systems. Lehman’s employees knew what behaviors would maximize their bonuses. They also knew these very same behaviors would not be in the long-term interests of their shareholders—that’s what made the incentive systems perverse. For example, targets were typically based on revenue income, not profit, and individual effort was often rewarded ahead of teamwork.

• There was no long-term unifying vision. Lehman wanted to be “number one in the industry by 2012,” but that wasn’t a vision—it was simply a desired position on the leader board. Lehman did not provide its employees with any intrinsic motivation to work hard to achieve that goal, nor any reason to work there instead of going over to the competitors. And that vision was far from unifying—there were ongoing power struggles between the New York and London centers.

Of course Lehman Brothers was not alone in pursuing a failed Management Model. With a few partial exceptions such as Goldman Sachs and JP Morgan, these practices were endemic to the investment banking industry. It was the combination of Lehman’s model, its fragile position as an independent broker-dealer, and its massive exposure to the sub-prime meltdown that led to its ultimate failure.

The key point here is that a more effective Management Model could have made all the difference. Instead, it was almost as if management didn’t matter. An encapsulated definition of a Management Model, something we fully explore in the next chapter, is the set of choices we make about how work gets done in an organization. One of the well-kept secrets of the investment banks is that their own management systems are far less sophisticated than those of the companies to which they act as advisors. For example: people are frequently promoted on technical, not managerial, competence; aggressive and intimidating behavior is tolerated; effective teamwork and sharing of ideas are rare.

Nor are these new problems. In 2002 The Economist reviewed the state of the banking industry and called the investment banks “among the worst managed institutions on the planet.”² And back in 1993, following an earlier financial crisis, the CEO of one of the top US investment banks wrote himself a memo, documenting all the managerial failings in his company, and concluding with the statement, “I think I am right in saying that the most demanding part is the management.”³ The harsh truth is that most investment banks have been poorly managed for decades despite—or because of—the vast profits they have made. The financial crisis of 2008 exposed these problems for all to see.

General Motors’ Bankruptcy

Let’s be clear that the investment banking industry is not alone in having ill-designed and badly executed Management Models. General Motors (GM) is another company with a long and proud history, though it finally skidded off the track in 2009. In the post-war period, GM was the acme of the modern industrial firm, the leading player in the most important industry in the world. But from a market share of 51% in 1962, the company began a long slide down to a share of 22% in 2008. New competitors from Japan, of course, were the initial cause of GM’s troubles, but despite the fixes tried by successive generations of executives, the decline continued. The financial crisis of 2008 was the last straw: credit dried up, customers stopped buying cars, and GM ran out of cash, filing for bankruptcy on May 31, 2009.⁴

As is so often the case, the seeds of GM’s failure can be linked directly to its earlier successes. GM rose to its position of leadership thanks to Alfred P. Sloan’s famous management innovation: the multidivisional, professionally managed firm. By creating semi-autonomous divisions with profit responsibility, and by building a professional cadre of executives concerned with long-term planning at the corporate center, Sloan’s GM was able to deliver economies of scale and scope that were unmatched. Indeed, it is no exaggeration to say that GM was the model of a well-managed company in the inter-war period. Two of the best-selling business books of that era—Sloan’s My Years with General Motors and Peter F. Drucker’s Concept of the Corporation—were both essentially case studies of GM’s Management Model, and the ideas they put forward were widely copied.⁵

So where did GM go wrong? The company was the model of bureaucracy with formal rules and procedures, a clear hierarchy, and standardized inputs and outputs. This worked well for years, perhaps too well—GM became dominant, and gradually took control not just of its supply chain but of its customers as well. We can be sure that economist John Kenneth Galbraith had GM in mind when he made the following statement in his influential treatise, The New Industrial State, in 1967:

The initiative in deciding what is to be produced comes not from the sovereign consumer who, through the market, issues the instructions that bend the productive mechanism to his ultimate will. Rather it comes from the great producing organization which reaches forward to control the markets that it is presumed to serve.⁶

This model worked fine in an industry dominated by the Big Three. But the 1973 oil-price shock, the arrival of Japanese competitors, and the rediscovery of consumer sovereignty changed all that. At that point, all GM’s strengths as a formal, procedure-driven hierarchy turned into liabilities—it was too slow in developing new models, its designs were too conservative, and its cost base was too high. A famous memo written by former Vice Chairman Elmer Johnson in 1988 summarized the problem very clearly:

... our most serious problem pertains to organization and culture ... Thus our hope for broad change lies in radically altering the culture of the top 500 people, in part by changing the membership of this group and in part by changing the policies, processes, and frameworks that reinforce the current mind-set . . . The meetings of our many committees and policy groups have become little more than time-consuming formalities ... Our culture discourages open, frank debate among GM executives in the pursuit of problem resolution ... Most of the top 500 executives in GM have typically changed jobs every two years or so, without regard to long-term project responsibility. In some ways they have come to resemble elected or appointed top officials in the federal bureaucracy. They come and go and have little impact on operations.⁷

A similar, though more succinct, diagnosis was offered by former US presidential candidate Ross Perot when he sold his company, EDS, to GM in the 1980s: “At GM the stress is not on getting results—on winning—but on bureaucracy, on conforming to the GM System.”⁸ GM found itself killed off, in other words, by the very things that allowed it to succeed in the post-war years—formalized processes, careful planning, dispassionate decision-making, and an entrenched hierarchy.

This story is now well known. Here’s the point: GM’s bankruptcy was caused in large part by a failure of management just as Lehman’s was. But the mistakes made by GM were completely different from the mistakes made by Lehman. To wit:

• Lehman motivated its employees through extrinsic and material rewards, and used incentives to encourage individualism and risk-taking. GM paid its employees less well, it hired people who loved the car industry, and it promoted risk-averse loyal employees.

• Lehman used mostly informal systems for coordinating and decision-making. GM emphasized formal procedures and rules.

• Lehman had no clear sense of purpose or higher-order mission. GM had a very clear and long-held vision—to be the world leader in transportation products.

Like Lehman, GM’s demise can be explained by any number of factors. Some of these are purely external, such as Japanese competitors and rising oil prices in the case of GM, and poor regulation and policymaking in the case of Lehman.

My view—and the thesis of this book—is that we have to look inside, to the underlying Management Models that both companies adopted, subconsciously or not. We will examine shortly what a Management Model is, but for the moment we can think of it as the set of choices we make about how work gets done in an organization. A well-chosen Management Model, then, can be a source of competitive advantage; a poorly chosen Management Model can lead to ruin. And Lehman and GM illustrate nicely—but in contrasting ways—the downside risk of sticking with a Management Model that is past its sell-by date. As do Enron and Tyco, for example, which also went through high-profile bankruptcies.

Disenchantment with Management

Management as we know it today is struggling to do the job it was intended to do. But we can also see evidence of a creeping disenchantment with management as a discipline. Here are some examples:

• Management as a profession is not well respected. In a 2008 Gallup poll on honesty and ethics among workers in 21 different professions, a mere 12% of respondents felt business executives had high/very high integrity—an all-time low. With a 37% low/very low rating, the executives came in behind lawyers, union leaders, real estate agents, building contractors, and bankers.⁹ In a 2009 survey by Management Today, 31 % of respondents stated that they had low or no trust in their management team.¹⁰

• Employees are unhappy with their managers. The most compelling evidence for this comes from economist Richard Layard’s studies of happiness.¹¹ With whom are people most happy interacting? Friends and family are at the top; the boss comes last. In fact, people would prefer to be alone, Layard showed, than spend time interacting with their boss. This is a damning indictment of the management profession.

• There are no positive role models. We all know why Dilbert is the best-selling business book series of all time, and why The Office sitcom was a big hit on both sides of the Atlantic—it’s because they ring true. The Pointy-Haired Boss in Dilbert is a self-centered halfwit; Michael Scott (or David Brent, if you watched the UK version) is entirely lacking in self-awareness, and is frequently outfoxed by his subordinates. If these are the figures that come into people’s minds when the word “manager” is used, then we have a serious problem on our hands. Interestingly, the phrase “leader” has much more attractive connotations, and some positive role models—but we will come back to the leader versus manager distinction shortly.

Except in sitcoms and comic strips, managers don’t go to work in the morning thinking, “I’m going to be an asshole today, I’m going to make my employees’ lives miserable.” But some behave that way anyway, because they are creatures of their en...