Tools of the New Economy

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Here is a guest article. At the moment, I prefer not to give you the name of the author, because this article might be detrimental to him.

Review, Moments and Retrospections.

I cannot offer a piece based on scientific research, but I can report what I experienced during my professional career.

Change is what characterizes an economic system and in the Federal Republic of Germany, said changes started in 1967 without anybody noticing. That was when the constant economic growth first suffered a temporary standstill. To be sure, the prevailing model of a free economy of western European design was not yet revolutionized, nor did that happen during the following crude oil shock experiences of the years 1973 and 1983.

The ”Deutschland AG“ with its charismatic leaders remained intact until the “Wende”. Up until early in 1990, the founding fathers of the post-war middle classes remained on their seats. After that, the beginning globalization of a single economic model rang the bells for change.  This new economic model is better known as “New Economy“, others also call is neo-liberalism. An ideological basis for the “New Economy“  model was probably laid by Milton Fridman with his ”Chicago Boys“.

The ’Share Holder Value’ gained pride of place. Classic value creations and production processes apparently were too boring and had to be optimized. If a concern totalled less than >10, the performance was considered poor. If the expectation of the ’Share Holder Value’ are not met, you move on to become a managing director of the enterprise.

The value of the leaders is measured by their “Performance“ and the cost-effectiveness of the next result. After all, a high profit was promised to the shareholders in the portfolio.

Consequently, the stars of the “New Economy“ change between enterprises. Even totally different sectors were no reason not to go there: you move from insurance to electronic engineering, from media concerns to a discount chain, etc. – there is no shortage of examples.

How can this work?

In order to make an enterprise transparent for the stock market, you need special tools. “Controlling” is very important if you want to quickly determine the “shareholder value”, the equity price and the dividend.

This development also explains why SAP was such a success. Offering the necessary tools with a universal product, the programmer makes it possible to have transparency, process monitoring and control.

Let me be fair and add that these tools actually make it possible for concerns to have short-term financial success. Whether or not, however, said success is sustainable remains to be seen.

It is a fact that this “Business Model“ is now established. “Business Schools“, along with the media and all those enterprise counsellors that sprouted with the rise of the “New Economy“ preach the rules of the “New Economy“ in their seminars and activities right on location.

Model 1 – Retrospection

In all my life, I only wrote two letters of application: the first was when I applied for an apprenticeship and the second was when I wanted to terminate my career as a sailor and start working on the dockyard.

All the other jobs were coincidental.

Today, I preside over one branch of a German medium-sized enterprise. We sell technologically high-quality solutions that require some explanation. It is typical for this family enterprise that we started branching out on a world-wide scale early on and thus contributed to the German export success story.

The then director of the firm – at the time there was only the one – asked me on a workshop if, since I knew the market well and had all the technological qualities necessary due to working for one of his customers, I would be willing to establish a foreign branch.

My expected turnover was determined by none other than this director. Based on his observation of the market, he gave me a number he thought might be realistic.

It all happened without bureaucracy, quasi by handshake, as with all my foreign colleagues. Regardless of a total of 450 employees, we did not yet have a personnel department. All affairs pertaining to employees were processed by the accounting department and the head of finances.

Simultaneously, the head of finances handed me a simplified accounting plan which showed the monthly turnover, earnings, expenditure and profit. The director had a derogatory expression for this plan: ’ink piss’; yet the two gentlemen were friends. All the foreign managing directors reported back to the one director.

You can summarize it by saying we established a branch based on the understanding of the market and the director’s ’gut feeling’. He relied on his experience with humans when selecting his employee.
During twenty years of very successful leadership, he had collected his tools:

  • Knowledge about products, because he promoted developments as required by the market.
  • Knowledge about the production process, because problems were always discussed between himself, the chief constructor and the producers.
  • Knowledge of the market, because his information came from many branches and he visited many fairs and, of course, he was involved with the major customers and the major projects.

This is no longer the case.

Model 2 – Today

Here is how a branch director is selected today:

  • The company looks for an external ”Personal Consultant“.
  • The typical tasks of the job are defined.
  • A job description is written.
  • The candidates are pre-selected by the ’Consultant’ and then the sales director decides.
  • ’Human Resources’ will do the actual employing.
  • A business plan is made.
  • A budget for the next three years is determined.
  • If there is no prior experience, the numbers will be based on machine engineering statistics.
  • The work will be accompanied by a three-month ’Controlling’ phase. It documents the numbers for orders and turnover.
  • Simultaneously, monthly balance sheets for the accounting department, the banks and the auditors are written.

For some of you, this list is probably not very much of a shock. Still, it makes clear that quite a few things have changed since I was first employed.

New tools were added to the old ones of my then-director, and the same is true for new leadership levels:

  • Consulting
  • HR = Human Resources
  • Reporting
  • Controlling
  • R & D = Research & Development
  • IT
  • Marketing

Even the terminology is rather remarkable, isn’t it?

So what happened?

The medium-sized company was re-structured following the example of a modern, stock-market-oriented enterprise. Decisions that previously the owner himself or a long-serving director or the managing director made now have to follow a strict organizational pattern. They are newly distributed according to the rules and the tools of the “new economy”.

Those who now made the decisions had not grown up in the firm or the family. Instead, they came from outside and often had never worked in the field.

For them, it was not possible to rely on many years of experience in the sector and they could not rely on gut feeling. They depend on the “New Economy Tools“.

So why do we use these new tools?

All processes have to become transparent and predictable in order to make the planned results come to pass. If you cannot rely on your experience and your in-house competence, the process has to be controlled and monitored all the time. Consequently, the responsibility has to be distributed and ascertainable.

Are these tools suitable for medium-sized companies?

Not if we are talking technologically high-quality products that need explanation and are custom-made following individual specifications.

If all processes are pressed into a system and these processes are to be adhered to strictly, then there is no room for individual activities as sometimes desired by the customers.

This is absolutely deadly for someone whose expertise is on special applications.

The employees will capitulate before the technocracy. Everybody refuses to do it if something has to be done extremely fast, because “this is a sure way to get problems”. Employees have to justify why the pre-scribed path of process control was not followed. As a consequence, resignation will prevail – which can be measured by the increase of people calling in sick.

An automated controlling mechanism will inform the hierarchy about price fluctuations, process shortcuts, special bargains, etc. by email.

Result: even more frustration. Who wants to work in a company where every single movement of your hand is reported?
A universal operating program will automatically start as soon as the offer is written. It will accompany the construction, processing, purchasing and production and it increased the reaction times for the sales considerably, since the ’system’ will only work when all the required data have been entered.

So what worries me?

What I experience seems to prove that my worries were justified:

  1. Regardless of control, all products will naturally fatigue, which means that they reach a mature industrial age and can no longer be optimized as far as the costs are concerned – except maybe if you look for a radical solution such as outsourcing the production into a low-wage country.  Your only chance to lower costs is to continue developing and come up with new ideas.
  2. If someone is not familiar with the sector, he or she will not be able to install new ideas from the market. Instead, he or she will always rely on management tools, following the book.
  3. Since all responsibility is distributed, the actual responsibility for your own decision is no longer yours, either!

But I am afraid there is no “going back”.

Results

Using the new tools does not give medium-sized companies any advantages.

Process control is only efficient for efficient production, not for sales and development.

With this approach, the traditional strength of medium-sized companies, i.e. the quick and flexible innovative power which will always smoothly adapts to the market, will no longer be a factor.

What medium-sized companies need is leadership personalities who have grown up in a special field, or else have been recommended by their customers or suppliers, thus being competent on all levels of sales, the enterprise and the customers.

A constant flow of verbal communication must be possible, not some sort of communication created by workshops, leadership circles, Kick-off-meetings, but initiated spontaneously – why not over a glass of beer?

As I see it, creativity is not something you can switch on or off and good ideas will not wait until you next can offer a time slot for meeting or after the vacation.

We actually have these sorts of leadership personalities and I often met them in my professional life. It meant that I was able to collect experience and was always willing to give my best for success.

Dogma criticism

  • Who was it that laughed about the five-year plans of the communist ”COMECON“ before the Iron Curtain fell?
  • Did the five-year plans work?
  • To be sure, the planning was fine, but it was never good enough to prevent shortages or for the country to become a leader in product development.
  • The Western European countries felt superior to the planned economy model?

Now we started on a similar path by using the tools of the financial world in order to control even the smallest companies with the „New Economy Tools“. We no longer call it planned economy, but ”Business Plan“ or ”Budget“ or ”Quarterly Reporting“.

Now I write detailed three-year plans.

The fact that they are all result-oriented is detrimental for their sustainability. Incidentally, we copied the language of the ideologists along with the New Economy.

Iktaqw 
(I know the author quite well)
(Translated by EG)

 

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