Transcript of British Broadcasting Corporation's "Analysis" programme of 4 November 1999: ************************************************************************** ANALYSIS ROUGH COUNTING PRESENTER: ANDREW DILNOT PRODUCER: INGRID HASSLER EDITOR: MICHAEL BLASTLAND TRANSMISSION: 4 November '99 20.30 and 7 November '99 21.30, BBC RADIO 4 CAST IN ORDER OF APPEARANCE: PETER MILLER, Professor of Accounting, London School of Economics COLETTE BOWE, Executive Chairperson of Save and Prosper, and former head of the Personal Investment Authority STEPHEN THORNTON, Chief Executive of the NHS Confederation DAVID REYNOLDS, Professor of Education at Loughborough University JOHN KAY, Professor of Economics CLARE SPOTTISWOODE, Member of the Management Team of PA Consulting, London and former Regulator of the Gas Industry TERESA GRAHAM, Partner in Accountacy firm Baker,Tilly and member of The Better Regulation Task Force ANALYSIS ROUGH COUNTING PRESENTER: ANDREW DILNOT/PRODUCER: INGRID HASSLER DILNOT: How useful are rules? Is it better to set hospitals a target for waiting lists or to let them deliver health care their own way? When you're sold a pension, the company rep has to follow a list of rules as long as your arm. Is that a good thing? This more prescriptive, quantified, rules-based approach seems to be getting more popular recently. According to Peter Miller, Professor of Accountancy at the London School of Economics, there's a long tradition of linking quantification and the market economy. MILLER: The famous sociologist, Max Weber saw bookkeeping as at the heart, the essence of capitalism. You could say that neo-liberalism, let's say the last twenty years of British politics and that of many other countries has been dominated by the prevalence of counting in all its various forms. DILNOT: And we use the results of all this checking and counting to set the rules. Rules for employees about how to serve customers, rules for teachers about how to teach, for doctors about how to treat the sick. Colette Bowe has herself presided over some of these rules as head of the Personal Investment Authority. What does she think has driven the push for more rules and less discretion? BOWE: What's driving it to my mind is a definitely increased customer demand, customer interpreted very broadly for something, for safety, for knowledge, for information, for some sense of ' somebody help me to know whether I am doing the right thing'. From the choosing my pension, to knowing whether the sandwich I had at lunch time had a lot of fat in it. People want to know things that previously they were content to either take somebody else's word for it or frankly not worry about it too much. DILNOT: Whether its a pension or a hamburger, producers can't sell things any way they want any more. Customers demand power and information, wherever we feel we're not in control. Rules and regulations are meant to make us feel better by telling everyone everything whether we understand it or not, all in the name of transparency and openness. We want to know exactly what we're getting, to be able to rely on what we're advised or told to do. But as Stephen Thornton, Chief Executive of the NHS Confederation argues, there's a further reason for replacing discretion with rules. THORNTON: I think the issue is one about fairness and I think there is a sense that in this country at least, peoples' concept of fairness includes some understanding as to what they receive from the state as compared with other citizens. And they tend to see that on a national basis and I think a good deal of the present government's programme is very positive, establishing some clear performance frameworks for certain services, like cancer services, coronary heart disease and mental health. Very, very important laying a clear, national framework within which local clinicians and managers work locally, I think that is critically important. Likewise the introduction of the organisation called the National Institute for Clinical Excellence, which is in the news at the moment, being clear about those new interventions and new drug therapies which are thought to be cost- effective. It seems to be nonsense that individual health service organisations come to their own local decisions about those things, those are technical issues which are best handled at that particular level. DILNOT: After all, we've got to have some way of allocating resources in the healthcare system. Central decisions about what is and is not to be available at least address the question of fairness. And there does seem to be a particularly strong British desire for all to be treated equally. And there are other forces driving the shift from discretion. David Reynolds, Professor of Education at Loughborough and an adviser to the government. REYNOLDS: Historically I think what there has been is a breakdown in trust between I think public and the teaching profession and also government and the teaching profession. And if one thinks back to the 1970's and 1980's, teachers had huge autonomy, there was the autonomy of the teacher in a school, the school had autonomy within the LEA, the LEA had autonomy within the nation and what it generated I think was wide variability, in fact the curse of the English or the British education system is its variability. Some people used that space that they had very productively and generated world-class practise but we had a lot of people who didn't do that and we had a kind of tailor practise as well. So what happened was that people realised that giving what was virtually professional freedom in those days, wasn't working. And they have reacted against that to the increased specification, firstly of the outcomes, trying to tag the system back to meeting national needs and also the processes, trying to stop the blooming, as it were of thousands of flowers of different kinds of process and tagging teachers back to what works, to use the government mantra. DILNOT: So to fairness and consumerism as explanations for the move to a rules-based system, we need to add lack of trust. And the lack of trust isn't just between us and the professions, but between the professions and the regulators. Colette Bowe, the former investment regulator. BOWE: What the key parts of the regulations say is that you must know your customer, and for a long, long time the people who were developing regulation were actually quite loath to put too much more flesh on those bones. We used to say, look the fundamental duty, it is a sort of duty of care, you must know your customer, but actually, you have to yourself as a salesman or an advisor, you have to know what that means, you are meant to be a professional you must know. And what people in the industry said - and you have to have sympathy with this is look, actually we would like some prescription please. Because if we are going to get into serious trouble as many firms in this industry have done, if we are going to be fined, because of things like the practices of our salesforce, we need to know precisely what it is, you regulators who have these draconian powers, are expecting us to do. Now I always very much regretted that, when I was a regulator, I used to constantly say to people don't keep asking us for rules, don't keep asking us for rules, you know what the fundamental duty is, do it. But this industry has said, we would like prescription please, we want to be sure. It requires I think, enormous confidence in your own professionalism to be able to say, thanks fine, I know what it means to know my customers, leave it to me to work out what that means. DILNOT: From a former regulator this warning about the dangers of regulation is surprisingly strong stuff. Perhaps, despite all the arguments we've heard in favour of regulation, we're losing something by waving the rule book. John Kay, one of our most eminent economists, whose work has focused on what makes for successful companies. KAY: A good example might be the evolution of the banking industry for example which used to be conducted on the basis of relatively, loose and informal relationships developed over a period of years between managers and customers. In the 80's, in particular, that was supplemented by much more aggressive targeting, setting objectives, which on the one hand broke down a lot of these relationships, and on the other led people to meet these targets. You know, it was quite easy to meet a lending target if you weren't too concerned about getting the money back. So actually, the targets on the one hand oversimplified the objectives of the organisation, and the other they destroyed the kind of on-going relationships, which were actually the base of the kind of information transmission and exchange that you needed in order to conduct banking business effectively. DILNOT: So substituting clearly defined rules and targets for general aims didn't work very well for the banking industry, in fact they were counterproductive. For six years, Clare Spottiswoode enforced rules as regulator for the gas industry, after running her own very successful company. You might expect her to be a bit of a disciplinarian. SPOTTISWOODE: You can't run a company with a whole set of rules, what you have to do is say, what are we trying to achieve here? We are trying to achieve working with our customers and doing what they want, and that is going to vary enormously, so what I looked for, I actually didn't go and recruit, I was in the computer industry, I didn't go and recruit computer scientists, I recruited generalists who would be very good at computing. And the reason I did that was so that they could talk to customers and they would be alive to what they wanted and would be light on their feet and be able to change according to the circumstances - so no, flexibility was absolutely key. DILNOT: So do you think it is the case that a really successful business ought to be able to start the year with a very clear idea of where it is going and if it hasn't got there at the end of the year should be disappointed? Or is part of the measure of success, surprise and a bit of chaos? SPOTTISWOODE: Surprise and a bit of chaos. We used to regularly write business plans for our venture capitalists and we all admitted that we absolutely knew that whatever happened that business plan would not be kept to, and that was right. DILNOT: This sounds positively subversive, comply with your shareholders' desire for a business plan, give them a piece of paper, and then sit back surrounded by a little chaos and muddle through - as though the measure of success is almost not doing what you expected to, or at least not in any detail. What Clare Spottiswoode is describing is a world with objectives that are real, but not very clear, not detailed, just a destination rather than a description of every turning to take you there. And John Kay argues that we can see the power of this prescription in real examples of more and less successful companies. KAY: General Motors employs ten times as many people as Toyota, although it produces very few more cars. Now that is partly because Toyota is more productive than General Motors but it isn't that more productive, because the way Toyota functions is as essentially the centre of a network of supplying firms with whom it has long- term but relatively informal relationships. And it depends on trust to sustain these relationships and what in turn these relationships give it, is an openness with information and a flexibility of response which the General Motors structure, in which General Motors felt it had to own and control and monitor, everything that was important to the production of its cars, actually achieved less flexibility, less speed of response and less core reliability in what went into the manufacture of its automobiles. The fact that people operate by reference to whole set of tacit rules that aren't written down, couldn't be written down actually gives these kinds of economic structures real competitive advantages in the modern market place. And actually, the most important things that enforce contracts in business are not actually legal contracts, they are the needs and expectations that people have so that they will go on doing business with each other. DILNOT: So does that mean that in the extreme, the absurd extreme, a contract that is expected to persist indefinitely doesn't really need to have very much in it at all, because if it is going to go on forever, then you just jolly well have to work it out? KAY: Yes, I mean the best example of that we all know would be something like a marriage contract, where you don't need to write it down. The point at which you actually have to refer to the rules and the contract, then the relationship is no longer one which is worth, is going to profitable for either party to sustain. DILNOT: Most of us are appalled by the idea of detailed pre-nuptial agreements for just the reasons John Kay describes. But we're not surprised to see the shift to such contracts in economic life. And insisting on contracts like that devalues the relationships between people, or companies, and can positively encourage bad behaviour, the very thing they were supposed to prevent. Teresa Graham, a partner in accountants Baker Tilly, and a member of the government's Better Regulation Task Force. GRAHAM: Regulation as a means of getting rid of bad apples very often doesn't work, I think if you are a bad apple you are going to be a bad apple whether the regulation is targeted or fair or consistent, you are just going to go underground or whatever it is you do. So I think we have to be careful about thinking that regulation per se, changes behaviour, because I don't really think it does. DILNOT: And as well as failing to stop bad behaviour that's already there, there's a risk that rules, regulations and the measurements they rely on actually make things worse. Professor Peter Miller from the London School of Economics says measurement can have perverse effects of its own. MILLER: Without doubt one of my favourite phrases is 'What is counted, counts', and as soon as we start counting something we tend to become fixed on it. And we do it ourselves, we are worried within the University sector whether we get a five or a five star, or a four whatever and people will look down their noses at us if we get a four. Yes, of course, it matters enormously and people then tend to judge institutions, allocate money and then you get tied into a network whereby those rankings really, really do matter. So even if you are sceptical of them, you have to take them very, very seriously indeed. DILNOT: Targets affect behaviour. With rules go rewards for meeting them and penalties for failure. Who can blame teachers teaching to tests to get the best position in the league table, or the consultant focussed on waiting lists, the employee on meeting her performance target rather than serving customers. And there's a further worry, that by prescribing too much, we can entirely shut down the drive for innovation. Professor David Reynolds sees this as a real risk in education. REYNOLDS: It is a problem if you lay things down from the centre you create a profession which becomes accustomed to having things laid down for it. Now, and the worry is that things change so rapidly that one may have a profession that is slightly disabled. Which is why I think that what one needs to do, and I don't disagree with anything that has been done, I mean I have supported this whole-heartedly. What one needs to do is move beyond giving foundations to people and prescribing for persons to a situation whereby we skill people to make more decisions for themselves, to actually react to a changing environment in creative ways. DILNOT: Pretty remarkable from one of the architects of the numeracy hour. So have we come full circle? We took discretion away from the professions because we didn't trust them to do the right thing, now we seem to be asking them to take discretion back. Because in the end that is precisely what we want - professional people using their skills in our best interests, not simply relying on a set of rules. THORNTON: Clinical freedom is critically important in our society when we go to see our doctor, we expect that he or she is making judgements about our health that is in our interests. And that individual who is advocating for us has some freedom of manoeuvre and is not just working slavishly to some predetermined protocol. DILNOT: Stephen Thornton, Chief Executive of the NHS Confederation. But that freedom of manoeuvre is hard to allow alongside more and more rules about what can and cannot be done THORNTON: If I am critical of the present government and its approach in any way, it is that there are perhaps too many central initiatives, people talk of 'initiativitis', and not being able to distinguish which are the critically important ones from the others. There is also a concern that local people and local pressure groups feel disempowered in that critically important, local health service issues are not being addressed. The other problem is that when you have such a high level of central initiatives and central standards setting, those people who have already achieved the government standards feel disempowered. They feel that if you like, the rewards go to those whose performance is the worst, money goes to them to bring them up to the common standard. And those who have already got there feel, if you like, left out, feel unrewarded, so I think it is important to get the balance right between central control and local freedom. DILNOT: Every new rule may seem like a good idea at the time, but each adds to a sense of paralysis, distortion, and cost. We're all different, and rules find it difficult to capture that. Is it sensible to apply the same rules to everyone? Don't differences matter? Just thinking about schools, there's such diversity that the idea of compulsory uniformity seems bizarre. Professor David Reynolds. REYNOLDS: In America in my field, there are vast quantities of research into whether an urban school should be different to a rural or a church school to a non -church school. But in Britain the trouble was all the persons in my field, were, as it were, card carrying liberals, and what we did was research only disadvantage. So the trouble is that we haven't had the science that would permit us to definitely say that context matters and that some things are universal and some things should be context specific. So in as far as one senses what is happening, I think there would be a degree of happiness from central government with the results internationally from increased intervention, but of course it is worthwhile saying, I don't think anybody has gone as far as we have. And that is why the British strategies are interestingly now a focus of enormous interest, as our progressive primary schools have been of enormous interest to the world. It is our literacy and numeracy strategy, where you have your ten minutes at the end of every lesson, legislated for, the other countries come here because we have gone furthest down the road. DILNOT: So although we don't know enough about how we should vary the rules from one school to another, we're imposing them, and we're doing more and more of it, not just in schools, but in the NHS and elsewhere. John Kay. KAY: Yes if it were clear exactly what we meant by a good school or a good hospital or a good supermarket, it would be easy because then we could make all schools,hospitals and supermarkets good and then you have moved onto the next stage of what defines better ones. It is just necessarily bound to be case, you know, that the best have things about them that are hard to write down, hard to identify, hard to prescribe for, because if that wasn't the case then everyone else would have done it. There is always something uncertain, there is this wonderful phrase, 'Uncertain imitability', which is actually the key to competitive advantage. DILNOT: Generations of businesses tried to copy exactly what Marks and Spencer did, believing success would be theirs. But they could never really capture what was special about M&S, and now M&S is struggling too. Teresa Graham from the Better Regulation Task Force thinks we need a world which is prepared to be vague. GRAHAM: I dream of that world where we have regulation which is goal -based rather than prescriptive, where 'this is what we want you to do and therefore do it in your own way and what best suits you'. Big businesses love that, small businesses however have more of a problem with that, because small businesses don't want to have to think about how to do it and therefore they are more inclined to accept more prescription that we are trying to avoid. So I think what we need to do is to have a goal- based system, but where we might give examples for smaller businesses and say if you are doing, this, this and this, you are covered. And they stick it on a wall or put it in a book or whatever they have to do and life goes on and everyone is happy. DILNOT: So do you think we have lost anything as we have moved from a world of more discretion, more freedom, to a world of less of that? GRAHAM: I think speaking as an individual consumer, I feel that I have lost a lot of choice in what it is I want to do and how it is I want to do it. Speaking as someone who runs a business and also helps others run a business what I think they have lost is a lot of money in having to pay to comply with this unnecessary regulation. DILNOT: The loss of freedom, discretion, autonomy is expensive, because in the end it doesn't work very well. Clearly defined, enforceable rules simply can't capture what makes a dynamic firm, an effective hospital or a brilliant school. We need to rely more on general objectives, on relationships, on informal ways of evaluating outcomes. It's quite easy to see this working in the private sector. But in the public sector, if we don't have hard information about exactly what people are up to we get nervous. Can we trust softer information and professional judgements about what works? Peter Miller from the London School of Economics. MILLER: There is no reason why it shouldn't be of use to the public sector, the difficulty people have with that type of information I think and the worry, and probably to some extent a legitimate worry in terms of let's say, the politics of evaluation is that, that seems to allow particular individuals to acquire power, to acquire influence, and to be the focus and centre of the network. And therefore, potentially to reduce accountability, and I think that is one of the big worries. The problem actually, if we were to speak of the public sector, the real problem is to find a way to build those forms of informal evaluation into something which can be tied into the networks of accountability. DILNOT: And do you think it would be fair to say that there is here an almost inherent tension between accountability and openness on the one hand and flexibility and the ability to respond to changing circumstances on the other? MILLER: Yes, that is a very nice way of putting it. The ability to respond quickly has to depend to an extent on a loss of detailed accountability and formal mechanisms, as soon as you have those formal mechanisms you slow up the process and that is one of the big problems. DILNOT: Delay costs money, and none of us wants that. So is there any reason left to cling to our habits of rule making and regulation? Well there is one which still stands out. If we can measure performance against a rule, however bad the rule, at least we've got some way of holding professionals and companies to account. We cling to the idea that what we can measure we can check, and it may be getting worse. Clare Spottiswoode says we're even regulating the regulators. SPOTTISWOODE: There is now quite a move to say that discretion should be taken away and that it should be directed by ministers. Now the problem with that is what it does is, once you take away that discretion it means it is very difficult to allow companies to respond in an innovative way to situations, and for regulators to respond in an innovative way to situations. DILNOT: It's easy to want power, while leaving the accountability with the regulators, the teachers, the employees, the doctors. But it's not fair. SPOTTISWOODE: There is an issue about power and accountability and one of the things I always felt very strongly was that if I had the accountability then I also had to have the power. Now if the politicians want to have the power then they must also have the accountability. So when politicians started saying they wanted to 'guide', I got really quite concerned, because guidance means that they could have the power, but actually the accountability came under the regulator. So getting these things right, I think you've got to put the power and accountability in the same place, I think that whole issue of exactly who has the power and who has the accountability is very important, and that is being blurred. DILNOT: And a classic example of that is that it really is a bit harsh on a local hospital, simultaneously to say, 'You must get your waiting lists down' and then ascribe any problems in local health care to the people running the hospital, instead of to the people who set the target in the first place? SPOTTISWOODE: Yes, and that seems to be a growing problem. DILNOT: We can't have everything. We can't at the same time demand a highly skilled workforce relying on its abilities, generating dynamic, efficient businesses, schools and hospitals in the face of a rapidly changing environment, and insist that they do exactly as we say. We can demand that businesses behave well, but we shouldn't have to tell them in gory detail what behaving well is. But we're all complicit in this, Colette Bowe. BOWE: People want the consequences of it, nobody wants regulation, people don't wake up in the morning and say, 'Great I hope somebody is regulating the food industry today' . But you do think, yes, I hope what I am going to be tonight is safe, not make my children ill. DILNOT: And in particular what we seem to want, having lost the sense of trust, is we want certainty and that is something we can't have isn't it? BOWE: We can't and yet of course, the more regulation is driven by peoples' need for either certainty or some other kind of security, the paradox is you can never have it. And the more regulation there is, the more people think, well we must be getting to this risk- free Nirvana, and of course what we are doing is perhaps just getting a better and better understanding of what the risks are. DILNOT: Setting rules highlights risks, it doesn't necessarily get rid of them. We mustn't fall into the mistake of believing we always know enough to prescribe, because that way we will lose the serendipity that flows from mistakes, variety, brilliance, innovation and disorder. That's surely how we've learnt in the past. So why does economist John Kay think we have so lost our way? KAY: We are intellectually in a mess and the reason for that is that we understand that markets are better than central planning systems, I mean we now have overwhelming empirical evidence that markets are better than centralised planning systems, but we don't really understand why. And I think it is only as we learn what it is that is truly going on in market economies that we will be able to handle these and these decisions better. I think we certainly didn't intend to throw away either trust or professionalism, I think we just misunderstood how these structures worked, and believed that greater clarity would actually lead to them working better, and that really isn't the case. That effective functioning, developing market economies, are actually things that evolve and change and bumble along in ways that you know, we can't prescribe for, can't write down rules for, and that is the essence of their effectiveness. This constant process of experiment, trial and error, pushing against the limits and seeing what works and what doesn't, the attempt to give more clarity, more definition really defeats that. DILNOT: We can see what works but it can't be captured in a set of rules. The failure of central planning behind the Iron Curtain should have taught us that. The irony is that we all - business, government, citizens - bow to the wisdom of the market while simultaneously demanding transparency through central control, rules and regulations. Far better, surely to let a thousand flowers bloom, and struggle with the consequences. **************************************************************************