Cost cutting isn’t the answer for modern managers

London, July 8:

Name half-a-dozen hero managers, American or European, worthy to tread in the inflated footsteps of General Electric’s retired Jack Welch. For that matter, name the non-heroes paid to manage General Motors, Ford and Chrysler. The dearth of brilliant managers isn’t just a phenomenon of over-large multinational failure, but a symptom of general change.

At all levels, management is not what it was. Another quiz. When did you last hear of a new management bestseller or golden guru whose name makes the welkin ring in the executive suites? Where is the latest Big Idea, the heir to Total Quality Management or its offspring Six Sigma, whose endorsement by Welch led to a rush of programmes for cutting costs and boosting profits - with 82 per cent of America’s top 100 signing up? A funny thing happened on the way to Nirvana. An escapee from Welch’s GE, James McNerney, brought Six Sigma into 3M with a vengeance to ‘decrease production defects and increase efficiency’. Thousands of staff ‘became trained as Six Sigma black belts’. Up went the shares and up went McNerney’s reputation as the hero who saved 3M from being ‘unwieldy, erratic, and sluggish’.

But off went the hero to an even bigger job at Boeing, leaving behind a still troubled 3M whose vital force - masterful innovation - had been sucked dry by over-rigorous management. As today’s CEO, George Buckley says, “Invention is by its very nature a disorderly process”, before which Six Sigma is helpless. But this is scarcely news. What Business Week calls ‘the struggle between efficiency and creativity’ is the essence of management. But the big-time lesson now being learnt by students and top executives alike is that, in 21st century management, the end not only justifies the means, but shapes it. McNerney ‘jolted 3M’s moribund stock back to life’, while Buckley’s shares ‘are up by 12 per cent since January’. Six Sigma is fundamentally a modern-ised version of the cost-cutting drives to which managers have always resorted.

There is, naturally, a relationship between cost reduction and personal ambitions - above all, financial ones. The share price is the crux of the matter. As results improve, stock options and bonus stock should rise. The driver of executive riches, however, lies not in real results, but in the deals cut in the remuneration committee. The rewards that the bosses negotiate - whether coming, going or just staying there - determine how brightly their prizes glitter.

Every force in the rewards mix has been remorselessly driving upwards. One driver is pure envy. Executives eye the breathtaking rewards of hedge fund, private equity and corporate finance players. But envy has other spr-ings; the IT inventors and investors are paying each other billionsfor business-es that are babes in arms.

Outside the web, the rewards of true entrepreneurship are less lavish, but not by much. As 3M has discovered, the payoffs have little relationship to counting beans, but everything to do with the innovative qualities that originally drove star companies onwards and upwards. Satisfying customers and creating new business define prime aims of good management.

The companies mentioned above once led the world. GM, Ford and Chry-sler dominated vehicle ma-nufacture no less than 3M did tapes and Boeing civil aviation. In all the has-been cases, top executives could sleep comfortably, confident in gilt-edged market shares and boastful about their management skills.

That game is long over. Marks and Spencer similarly saw safety turn to danger before Stuart Rose returned to retailing basics: now the stores’ mammoth, Wal-Mart, may need similar retail therapy. ‘Down in the Mouth’, warns the Business Week headline, ‘over Slowing Growth, Dimming Prospects’. Such dismal combos cry out for an effective strategy that managesthe top line, enlarging turnover by innovation and initiative, rather than overplaying the bottom-line Six Sigma routine of slashing costs and staff.

Enter (or rather exit) the gurus, from the gung-ho philosophy of Tom Peters to the scholarly understanding of systems demonstrated by Peter M Senge. They all presume larger ambitions than cutting costs, raising productivity and extracting tens of personal millions. But managers have learnt from their fellows where to train their sights: on personal payoffs.

Back in the late Sixties, one supposed semiconductor saviour was welcomed with $250,000 cash, $5.4 million of stock options, and an interest-free loan of $5.4 million: his employer duly lost $27.1 million in 1970-71. But three greedy decades on, such abuse of executive reward has mushroomed. The supposed basic incentive of capitalism is to reward beneficiaries for their achievements.

Now the undeserving win stupendous rewards forachievements yet to be recorded. When the executive life is crammed with such monstrous unearned goodies, who needs to master the risky business of real growth?