The Pitfalls of Productivity

Metrics, KPI’s and incentives can be dangerous things. Just ask the CEO and senior leaders of Wells Fargo, who were proud of an incentive scheme rewarding staff for opening new accounts until it landed them in court and in front of a baying senate. Staff had responded to the scheme by opening false accounts en masse, in many cases robbing real customers of their money.

I saw many such pitfalls during my time in business, though none as openly fraudulent as this one. Management rightly tried to use simple, targetable metrics to steer their businesses, a practice that only became more widespread once scorecards and dashboards came into vogue. Sometimes the real target was the leader’s own bonus package, but more often than not I witnessed a genuine attempt to improve a complex business.

But the attempt backfired almost as often as it succeeded. A common example is the trade off between volume and margin. Sales people love volume targets and respond well to incentives on volume, but the risk is that they chase down prices in their zeal or target customers of low value. In the short term, margin incentives can make more sense, but not if they result in collusion with competitors or in pulling back from profitable, if marginal, clients. Further, margin is usually more complicated to measure and influence, and sales people value simplicity.

The most dangerous indicators are usually ratios, KPI’s measures as X per Y. A margin target is usually a ratio, something like dollars per litre. An acid test of a good ratio is that it is always beneficial to both increase the numerator and to decrease the denominator. In the case of a margin KPI, it will almost always be good to grow the dollars, but often not good to reduce the litres. Further, reducing the litres is the easiest way to shift the indicator in the short term. So such a margin target runs a severe risk of a department follow a “golden litre”, that is shrinking the business down just to the most profitable clients, a sure recipe for a business death spiral.

Shell and others tried to get around the volume/margin dilemma by targeting a concept called contribution. This was sound, and generally successful, but it lacked simplicity and often left sales people confused.

In call centers, a common incentive KPI is time per call. True, dealing with complaints and enquiries quickly is a good general idea, but not at the expense of being thorough. In some cases, employees have been known to put the phone down on customers where the call showed signs of dragging on.

In Shell retail, another example of a ratio metric was called efficiency index, defined as sales volume per station compared with the market average. This had the same downside, namely that while growing volume is certainly good, reducing station numbers can be easier and unhelpful to the business. What if those stations still made a good contribution, and had low capital and costs to serve, low risks and low effort intensity? That was usually the case with dealer owned stations. I preferred a metric of company owned efficiency index, once again with the downside of loss of simplicity. I guess the moral is that business can be complex.

And if business is complex, so is macroeconomics. Central banks and governments face the same pitfalls in trying to find and influence levers to improve performance. And most politicians make the CEO of Wells Fargo seem honest. Maggie Thatcher relentlessly tinkered with definitions to try to obscure the scale of unemployment her policies caused. The Kirchner’s in Argentina gutted their statistics. We can trust very little data coming out of China, and the investors know it, but fear shouting out for the same reasons they pretended all was well with sub-prime mortgages eight years ago – their own golden eggs depend on the deception.

Even honest Economists have difficulties, one notable one being that times change. Forty years ago policy was all about avoiding devaluation, then it became a helpful tool, only we didn’t see how helpful until the Euro zone discarded it. Much of the current weaponry was designed to control inflation, but now we realise that we need more of it not less.

There is a faction trying to redefine GDP, or at least to replace the current definition of GDP in many key indicators. Partly this is because GDP itself has become slightly out-dated, because it doesn’t really reflect things that have low manufacturing component or are almost free like internet access or Airbnb bookings.

One thing we can still do is to choose to use GDP total or GDP per capita. Businesses like GDP total, because that drives activity and demand for them. But for wellbeing of citizens, GDP per capita matters more. Japanese GDP is declining, but mainly because the population is shrinking. That carries challenges, but one of those is not immediate poverty, since GDP per capita is still rising.

An indicator that seems to have survived the test of time is productivity, defined as some measure output per a chosen unit of input, usually labour hour.

 I first studied Economics in the 1970’s, and at the time UK labour productivity was suffering compared with that of Germany and others. Pundits had easy explanations. British workers were lazy, and usually on strike. British managers lacked drive. Germany benefited from having lost the war, because it meant its infrastructure could be replaced.

Even back then, it was possible to see the problem with the indicator. Higher productivity was generally good, but which of these explanations was most likely to be right, or was it a combination or something else? And what exactly could policymakers do to improve things? In practice, the politicians chose their own causes and remedies – so for example the right demonised trade unions.

Since then bigger problems with the indicator have emerged. It seems difficult to predict and sometimes moves in surprising ways. But worse than that, it suffers from the classic problem with ratios – increasing the numerator is good, but reducing the denominator is not unless there is full employment, which there rarely is nowadays. Indeed, much government policy is designed to create jobs, irrespective of any output generated.

So we have an indicator that has lost its lustre. The numerator seems poorly measured, due to the trend away from manufacturing. The denominator is not something governments want to reduce. And the metric is not intuitive or simple or even particularly actionable.

So why do we still measure it? I suppose there is some potential merit to trying to improve output per unit of input, if only the output could be measured and the input was somehow constrained. I’ve read many explanations for its trend, but not my own pet theory, which is that it measures the sort of portfolio of work an economy specialises in. Policy in the UK, and increasingly the US, drives more people into low wage service jobs. As this constitutes a greater share of the mix, productivity goes down. But so what?

Productivity fails so many tests of a good indicator. Perhaps the only reason it is still popular is to support a pet theory of a politician or partisan economist, such as enabling union bashing or lobbying for infrastructure investment. It is time to consign this indicator to the dustbin.           

9-11, Anthem Protests and Prodigal Sons

This past Sunday was the fifteenth anniversary of the attacks on New York’s twin towers, the Pentagon, and (failed) congress. This is always a poignant day in the US, and a chance to remember the victims and much more besides.

What has been great about how the 9/11 legacy has developed is that it has become a day of service. Volunteers everywhere choose that date to do something to help others. I’m not really sure how or even why that started – perhaps it came out of some linkage of first responders to service, or maybe simply a wish to do something on the day. But it has become a good tradition, and many Americans show themselves at their generous best each time to anniversary comes around.

The other side of it is less good, as the nation uses 9/11 to glorify the military and its global dominance and talks of enemies and revenge. This year the anniversary came on the first day of the NFL season, unfortunately, and the games were surrounded by patriotism dressed up in flags, military uniforms and implicit threats to imagined enemies. The NFL does some of this even on normal days, selling itself somehow as a militarily patriotic institution.

I sort of don’t mind this aggressive patriotism, it passes over my head, but I do get angry when in the same breath the commentators refer to teams as world champions and games as world finals. This is having it both ways – Americans can portray the NFL as a global game (somehow) and display it for a global audience, or as a domestic game with domestic symbolism, but not both at the same time.

The excuse for the world champion description is that Baseball’s playoff finals were originally sponsored by a newspaper called the World, who labeled it World Series. The name outlasted the sponsorship, and has lazily drifted to a completely different meaning and to other sports. At least in major league Baseball there is one Canadian team playing – the NFL cannot even boast that.

At any US sporting event, there is likely to be a national anthem sung, or another patriotic song such as God Bless America, often woefully. Crowds generally spontaneously stand and remove headgear, which I suppose is impressive. And I can’t complain too much, they still play God Save the Queen in some British theatres before performances.

So it is an interesting choice by Colin Kaepernick, a fading NFL player, to start a new type of protest by ostentatiously sitting or kneeling during the national anthem. His protest is against unequal treatment of people of colour, which he says debases what the anthem stands for. The protest has spread, though so far not out of control, with some other players copying him or raising a clenched fist instead.

The protest has caused confusion among pundits, which has potentially created the desired effect of highlighting the cause. Many find it unpatriotic and disrespectful of the military, especially on a day such as 9/11, but most respect the right to protest, sneakily suggesting that it is not a good choice of method, or that he would be better served to seek solutions rather than merely complain. But great social changes have not generally come about by politely complaining. It will be interesting to see how this develops, and it might yet play a role in the upcoming elections.

For me, the other noteworthy juxtaposition on this 9/11 was the fact that it came on a Sunday, one where the Christian Gospel included the parable of the Prodigal Son. On a day when more Americans than usual will have attended Church, this will have posed challenges and opportunities to preachers throughout the land.

The Prodigal Son is a great parable, and also one amenable to many different interpretations and messages. The basic meaning is clear, that God’s mercy is infinite, and it is never too late to repent. But beyond that things are less clear. Do are we really like the father in the story, or indeed the like the other characters featured in the Gospel, a widow finding a lost coin or a shepherd leaving his flock to search after a stray sheep? If so, is that only a good thing? What about the elder son, who resents the special treatment of his brother, having toiled without blemish himself? Why might the second son have behaved so badly? And with whom should we identify and learn, the father or either of the sons?

It is rich material. I regretted going to our own local Catholic Church and not to the Episcopal St. Bart’s in Manhattan, which organised a special 9/11 service and where the preachers are invariably courageous. Our priest did highlight the elder son, but claimed that most of us would not act as the protagonist did with sheep and coins and forgiveness of errant offspring. I am not so sure, I think most of us do focus on fixing a problem at the expense of protecting a strong point, because our nature makes us and because the pleasure of turning situations around is so great. Our priest linked the exceptional mercy of God to the pain of those still suffering after 9/11, concluding that there was always hope.

I expect at St. Bart’s they were braver, and I wonder about how many other preachers were too. The key character is the elder son. While I have many times behaved like the prodigal son and been painfully aware of it, and sometimes behaved like the father for good or bad reasons, I have nearly always behaved like the elder son, often unawares. I guess most of us are the same.

It is significant that it is the elder son that loyally does his duty but resents his lack of adequate recognition and the special treatment of his errant brother. In traditional societies, even today, the elder son is the privileged one. He inherits most of the land, gets the best schooling, has first choice of wife and is generally well looked after. I am an elder son. Our risk is that we somehow treat these privileges as expectations, or even start to feel that somehow we have earned them, and have to defend them. Then we can sit on our high horses and judge others. Instead we should be counting our blessings, seeking to serve and share, and looking to improve.

The elder son can be analogous to anyone born to advantage. That’s most of us, folks! It is anyone white, or male, or straight, or born to a stable family or a family of adequate means, or of a beneficial nationality, or living in a time of relative peace. How often do we count those blessings, seek to serve and share, and look to improve? How often do we instead become defensive and judgemental of others? Listening to the US election campaign, I’d say too often – Clinton supporters as well as Trumps, especially if we were not repelled by her recent condemnation of his supporters as deplorable. Our reactions to Colin Kaepernick might betray something similar. As Europeans, our treatment of the migrant crisis certainly does.

On 9/11, the bravest might take the analogy one step further. Of course it is a time to mourn the dead and laud the first responders, and perhaps it is a step too far to forgive the perpetrators. But, as a nation, the US reacted to 9/11 in the role of the elder son, defending unearned privileges and exacting brutal revenge towards innocent people. There has been precious little evidence of counting blessings, seeking to serve and share globally, or looking to improve.

9/11 offered a chance to take a growing perspective as well as a mourning one. In his way, Colin Kaepernick and his cohorts nudged us in that direction. The Gospel of the day, if we cared to reflect deeply enough, screamed at us to take the wider perspective. I can only hope that a few brave preachers took the chance to help their congregants to do so.  

Attracting better politicians

A politician in a democracy is a strange job. Perhaps that is why most of the current ones do not serve us well. I wonder how we could change that.

Like so much else, the role has evolved too slowly from its historical roots. Back in the 19^th century, an elected politician was often unpaid and usually had private wealth. The entire electorate were privileged men (no women), and some of the gentry felt attracted to sitting in parliament, perhaps because their Dad did, or because they felt some civic duty, or perhaps because they had some urge to campaign for some vested interest.

So the job was part time. Skills needed were free time, independent wealth and some networking and persuasion. Perks included lots of free meals and alcohol. It was not necessary to be all that intelligent or even diligent, the civil service did all the real work. It also tended to be a job for life – age was an asset, and incumbency very powerful.

Well, this list is hardly ideal if the intent of politicians is to make good decisions on behalf of a populace. Yet the list has hardly changed! Politicians are still usually old, of limited expertise, and independently wealthy. The reason is that the system and working methods have not evolved with modern times. One reason for that is that the system as it is benefits the ones who set the rules, the politicians themselves.

I have a soft spot for Nick Clegg and the Liberal Democrats in the previous coalition government in the UK. They were relentlessly attacked by the press, and their flimsy, protest-based support crumbled under scrutiny, but actually their record was good. They achieved excellent signature policy goals via increases in personal allowances and education premia for disadvantaged kids. Yet the Tories managed to stifle the main goal of reforming the electoral system. The Liberals had a selfish interest in reform to give them more seats, but they also had creditable goals of fairness and professionalism in politicians. They wanted to make the House of Lords less unrepresentative, but also to make political careers more attractive to women and people without financial means. The Tories ruthlessly blocked all this. Getting turkeys to vote for Christmas is not a simple task.

It is quite instructive to look at the backgrounds of politicians across the world. The Economist completed a survey a few years back. In the developed world, the leading profession is lawyer, and nowadays second comes career politician, with business careers third. In the developing world, businessmen (indeed usually men) predominate. Sadly, that reflects the corrupt benefits of political influence to business.

Lawyers don’t generally make effective politicians, in my opinion. Ted Cruz is a good example of a lawyer politician. He has money and a good network from his career. He uses those to discover core positions that resonate with a group of voters and, more important, with wealthy sponsors. Then he uses his training to articulate arguments to block any position that an opponent advocates, even resorting to tactics such as filibuster and shutting down legislatures. The net result is a stifling cynicism and blocked law making.

Career politicians can go the same way. They have an even bigger incentive to win and retain power because they don’t have a back-up career; it is success or nothing. Hillary Clinton is a good example of a career politician. She spent her early years building her sponsor network, and building a reputation around some effective policy implementation, in Hillary’s case centred on the rights of children. Then, once entrenched, they behave like the lawyers. Now, depending on your degree of cynicism, you can view those policy successes in different ways. Is she really passionate about improving the lives of kids? Or is she really just passionate about building her brand? Probably the truth lies somewhere in between.

Still, lawyers and career politicians are certainly preferable to another archetype, the rich narcissistic bully, of which of course Trump is the textbook case. Many developing world leaders fit the same mould. Those people are often corrupt, ruthless, and peddlers of rabble-rousing type policies.

We should not be surprised that these are the type of politicians we get. It is a special type of life. A politician must usually be pretty cynical and unprincipled to succeed, always avoiding a gaffe rather than taking a risk, collecting a dollar rather than defending a good cause. They are in the spotlight, frequently dissected and abused. Only those with a huge ego or a certain cynical determination will generally be attracted.

There are some wonderful exceptions. The young labour MP who was killed during the Brexit campaign, Jo Cox, came to politics as a young activist, and had the passion allied with the practicality to make a great success of her job. Many such young people abandon politics once they see the cynicism required, choosing instead a life in NGO’s or international bodies like the UN. They do great things there, but politics needs all the talent it can get. Arguably, David Miliband falls into the same category.

Two other exceptions come from another throwback category, children from Church families. The fathers of both Angela Merkel and Theresa May were preachers, and those two seem to have acquired a strong sense of civic duty combined with sound values and more practical skills. Both have come through the brutal rough and tumble of political careers with unsullied reputations and exceptional staying power.

When considering just how woeful the political cadre has become, we can only thank goodness for the enduring quality of the civil service in many developed countries. I believe that is also a positive legacy in British colonies, leading to generally stronger governance in those compared with former colonies of France or other powers, where less priority was placed on developing that sort of institution.

So what can we do to make politics more effective? Reformers to tend concentrate on the fairness of a political system, but that is unlikely to attract more of the right sort of talent into this crucial vocation. Finance reform, especially in the US, can only help, but perhaps that is marginal too. Somehow we need to change the entire job description and way of working, Is that possible?

I don’t have many solutions to this quandary. Making the job smaller and more compartmentalised might be a good principle. That would certainly deter the Trumps, Clintons and Cruzes, with their grand ambitions and overblown ambitions. The Coxes would still be drawn to make a difference, and the tortoise Merkels and Mays could still contribute.

Smaller political jobs could be achieved in many ways. Devolution of power locally has great potential. Delegation can also happen upwards, with expert bodies like the UN given greater influence to constrain the playing field. Experts could also be given autonomy over more national policy areas: central banks nowadays control monetary policy implementation, so why not fiscal as well? Politicians can define key principles, and leave implementation to others, taking a lot of the current risks away. Another way to create smaller political jobs could be to make more of them part-time or short tenure.

The current political class is woefully inadequate. A large reason for this is that the current job description predominantly attracts unsuitable people. To rectify this requires more than marginal reform. A key reform principle could be to make the roles smaller.

But here is the bad news. Of course, only one group of people have the power to legislate such reforms. That group are the current politicians. So I don’t think we should be holding our breath on this one.