Facilitators and Institutions Defined

The distinction between 'facilitators' and 'institutions' is a theme that has emerged quite strongly in this blog and is discussed in Chapter 2 of Lipstick On a Pig. In essence, I've defined "facilitators" as organisations that exist to solve their customers' problems; and "institutions" as organisations that exist to solve their own problems at their customers' expense.

To be more specific, I've extracted the following characteristics that I believe mark an organisation as being one or the other. Broadly, these characteristics group into themes of alignment, openness, adaptability, transparency and responsibility.

So, a 'facilitator' is organised to solve its customers’ problems, operates openly, adapts well to changing circumstances, is committed to transparency and takes responsibility for the impact of its activities on the wider community and society.

I update this post from time to time and am interested in any comments you may have.

Facilitators:

 Alignment

• exist to solve problems that their customers encounter day-to-day as part of wider end-to-end activities (i.e. customers don't 'pay' or 'bank', they make a payment as a single step in a much longer purchase process);

• don't presume to 'own' the relationship with people who use their products, and see customers as the controllers of that relationship;

• accurately define real problems, assess their real scale, identify root causes and implement proportionate, efficient solutions;

• view the world through the eyes and experiences of people who use their products;

Openness

• are prepared to work with complimentary businesses to support their users' end-to-end activities (including linking to material produced by others);

• seek feedback, welcome input and criticism;

• interact well with users in open forums;

• are 'free-rider tolerant';

Adaptability

• are highly adaptable and responsive to criticism; 

• allow ideas to develop from staff and users bottom-up, generating passion and connection amongst them;

• see uniqueness, change and adaptability as a source of competitive advantage;

Transparency

• work to simplify their products and users' experience;

• their terms and communications are clear, fair and not misleading;

Responsibility

• seek to make the world a better place in which to live, addressing the impact of their activities on the wider world.

Institutions:

Alignment

• Exist to solve their own problems at the expense of 'their customers';

• View the world through the lens of their own products (whether goods or services), rather than the activities in which users are engaged when acquiring or using those products;

• Regard themselves as controlling the relationship with users. 

 Openness

• Resist criticism and change – believing that their own processes, judgement and publicity should prevail;

• Impose their own views on staff and 'their' customers, top-down;

• Interact poorly with users (if at all) in open forums, experiencing 'vicious cycles' of adverse publicity; 

•  Are 'free-rider resistant';

• Mandate the use of their own add-on services, even where these are inferior those available from third parties; 

 Adaptability

• See running with the herd, or 'fast-following' as a source of competitive advantage;

• Demand that 'their' customers must become more capable if their products or experiences are to improve; 

Transparency

• Deliberately adopt complex pricing, conditions and 'pressure' techniques in their sales and marketing activities;

• Rely on cross-subsidies to distort the attractiveness of new products;

• Their terms and communications tend to be unduly complex and legalistic;

Responsibility

• Avoid addressing the impact of their activities on the wider world.

Why Should Londoners Help Cut Regional Public Spending?

I confess that I spent a long time ignoring politics and politicians. I didn't even vote, to avoid encouraging them. I figured if I kept perfectly still they'd lose interest and move away. And for a while it worked - John Major's heroically quiet government nearly brought spending down to a reasonable figure of 35% of the UK's output. At that sort of level, the tax burden can be reduced, there's more money for private enterprise, output increases, the government gets more tax revenue at the same rate - everyone wins. Or at least the Australians and the Swiss do (source: OECD, hat tip IEA, p. 47).

But the UK figures turned truly nasty during the noughties, and that certainly grabbed my attention. By 2009, Gordo and his cronies were spending an amount equal to about 50% the UK's output.  That left the UK in a terrible hole, and it's difficult to believe some hail Gordo as an economic saviour. Contrary to his own claim, he didn't put an 'end to boom and bust' - Mr Bust is alive and well and living high on his overdraft. And if you believe Osborne's plans for the greatest spending reduction since the invention of the stylus, he'll only cut national spending to 40% of GDP by 2015. 

But, for Londoners at least, the picture is a lot less depressing when you break down public spending by UK region. The rate of public spending has remained under 40% by regional GDP for London and the South East, while the rest of the country (bar the East at 45%) is way north, so to speak. In fact, public spending in the North-East peaks at a whacking 70% of regional GDP. England is cruising at 50%, while Scotland is at 60% and Wales and Northern Ireland are dragging around a millstone of government expenditure equal to 80% of their GDP  (source: HM Treasury, hat tip IEA, p. 57). 

As mentioned previously, the government is crowding out private businesses in the regions, and strangling their ability to compete, nationally as well as globally. Manufacturing seems to have been hit hardest, but even a local services business will have to compete with the public sector for administrative staff. And if those people don't want to work for the public sector, they may as well head to... London and the South East.

Funny that. And even funnier that Labour attacked Tory plans to reduce regional public spending. Far from risking a regional recession, the policy change was an opportunity for the regions to rid themselves of the cold dead hand of government.

Of course, bound up in this are national schemes that put public funds in the hands of middle-class people who shouldn't have been taxed to pay for them in the first place. You also see regional MPs resisting cuts to those programmes, preying on the middle class fear that they won't lead to tax cuts.

But people seem to be missing the competitive element to all this. Not only do London and the South East benefit from the flow of dissatisfied regional private sector workers and businesses. But there must also be a risk that London-based policy-makers won't persist in trying to administer medicine the regions don't want. I mean, it's hard to get the attention of Ministers and senior officials at the best of times. But when they're under the sort of pressure they are today, well, maybe they just won't get round to doing the regions a favour...

Trading On Greed and Fear In The Middle-Class

The ebbing financial tide is leaving many weird schemes high and dry - Madoff's ponzi, Icelandic savings accounts, Irish real estate, Greece, Californian municipalities, Royal Bank of Scotland... So we should expect to see at least a little of the same weirdness among the UK public accounts. 

Actually there's quite a lot, as you've probably guessed from the title of "Sharper Axes, Lower Taxes" and its cover design. And you can rely on the Institute of Economic Affairs to point it out in this fashion. The IEA is a research and educational charity whose "mission is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markts in solving economic and social problems." Street: "We give it to ya raw." Don't look for a juicy political manifesto from these guys. The Tea Party they are not. Look for pragmatic next steps and the odd yelp. The choice is yours to make.

But the thought that struck me most often while reading this book was not how the carpet at HM Treasury will cope with all the blood. It's that the font of all weirdness in the public accounts is the lethal cocktail of fear and greed whipped up for the middle class. 

This is perhaps best explained by Kristian Niemietz in the introduction to his chapter on welfare spending. Basically, a spending decision is more likely to be driven by the range of people who appear to benefit than the reality of who pays. This seems merely obvious at first, though not planned. But this is textbook stuff for politicians and public officials. First, they create a 'fiscal illusion' by simultaneously highlighting the benefits of a spending programme to the recipients - including as many (undeserving and greedy) middle class people as possible - and shrouding the costs in mystic runes of Whitehall jargon and indirect taxes (but Whitehall can't even count, so it's likely to get this wrong). This is why politicians are accused of having no apparent means of funding their promises. And it's why we have VAT, and taxes on alcohol, tobacco, gambling and driving around, and employer contributions and public sector borrowing. These costs are designed to be forgotten. Then, because "there is no direct link between any particular benefit and any particular tax", the middle class (most voters) will not only welcome the policy behind the spending, but later resist the abolition of the unduly expensive benefit, fearing that it will not translate into lower middle class taxes. "The benefit is certain; the tax reduction that could correspond with its abolution is not."

To emphasis the fact that this is a genuine play on greed and fear in the middle class and not some kind of whacky conspiracy theory, Kristian points out that those who advocate "a drastic expansion of the British welfare state" call this effect "middle-class buy-in":

"while narrowly targeted policies will fail to draw on the strength of middle-class political pressure to defend welfare, policies with wider coverage actively recruit the sharp elbows of the middle class." The Solidarity Society: why we can afford to end poverty, and how to do it with public support. Fabian Society, 2009

This is why Richard Murphy recommends universal social benefits and comprehensive pensions for all, and national pay deals for local workers. The comfy middle class soak up the benefit but don't see the cost, leaving those on lower incomes to bear the reality of stagnating growth, fewer jobs and the lost chance to use their lower local living costs to compete in, say, manufacturing.

These tactics are a particularly insidious form of disease the only cure for which is the rapidly growing and seemingly unquenchable thirst for sunlight that is the subect of this blog. There is no substitute for obtaining people's informed consent to public expenditure. So it was certainly worth wading through "Sharper Axes, Lower Taxes" and I'll be featuring more from it. That's not to say I agree with every suggested chop, but I'll be doing my best to hunt out the fiscal illusions and suggest the pragmatic choice.

Role of The Entrepreneur

I recently made the point that, instead of looking to the state for our personal wellbeing, the buck stops with each of us personally - whether as voters, taxpayers or whatever - to ensure the wellbeing of others. Some basic, inevitable economic constraints mean the state simply can't do that job for us on any sustainable basis. This is also the difference between an entitlement culture in which we behave as passive victims of our institutions, and an empowerment culture, in which we seize control of those relationships. Ultimately, the state can only serve as a facilitator, enabling each of us to meet our fundamental personal obligation through private enterprise.

But how can we meet those obligations? Which business activities will be the winners of tomorrow? And how can the state help?

Peter Urwin's "Self-employment, Small Firms and Enterprise" very helpfully explains the role of self-employment, with and without employees, as our primary source of "genuine entrepreneurial insight". Big corporations are of little use here. Businesses don't start big. Entrepreneurs start out self-employed, either with or without staff. Yet, picking winning business ideas is impossible: while "entrepreneurship is crucial for economic growth... we have no idea where it will come from - not even in the most general terms." As a result, the best that we - and government - can do is to ensure "a climate in which enterpreneurship can thrive".

Peter lays out some interesting stat's for the UK:

• over half of all new businesses won't exist in 5 years time - yet this is no bad thing: serial entrepreneurship seems to have a greater influence on success than academic qualifications;

• you're more likely to be self-employed if you have dependents under the age of 16;

• about 20% of males who are active in the labour market are self-employed (42% of those aged 65+);

• there is no obvious impediment to being self-employed, and people who struggle for various reasons to fit the big firm mould tend to be self-employed or work for small firms;

• small firms are easy to start, but face impediments to growth through tax and regulation, such as taking on employees - in the UK, only 6% of new firms create over half of all new jobs.

• in particular, "the costs of compliance... are regressive, as there are economies of scale in tax compliance... product market regulation and employment protection legislation". These costs have remained constant despite efforts to eliminate red tape. However, these costs don't prevent people starting up or remaining self-employed with no employees, they inhibit expansion.

It's suggested that there's a distinction between being self-employed for tax planning purposes, and being self-employed for 'genuine' enterpreneurial reason. But if it's impossible to pick who among the self-employed will be successful, then I don't see how you can reliably make this distinction, except with hindsight. Step one to starting your own business is to become self-employed. Perhaps you take that initial step for cynical tax planning reasons, or maybe with a view to figuring out what sort of business you might start. In either case a bigger business could emerge, with lots of employees. Life's what happens to you while you're making plans. The motives are pretty meaningless.

However, Peter rightly points out that there's little room for entrepreneurial activity in large firms - even if self-employed people with the "skills of entrepreneurship" are involved. Those skills essentially being to provide "the central concept around which the firm is initially constituted" and "to unearth the unknown unknowns." I've worked in two start-ups, both of which are still running after 10 and 7 years respectively, and various large firms. Once a bunch of people unite around any business plan it becomes tough to change. Add more years and more people and the job gets harder.

So it's laughable to see big corporate executives and entrepreneurs lumped into the same category, as Luke Johnson recently explained, though the CEOs still at the helm of the companies they created are in a category of their own. This latter group also prove the case for a lack of demand for genuine entrepreneurial skill in big corporations. It's the original vision of the founder that rules, and competing strategic visions aren't welcome. In fact, it's not uncommon for a business to oust its founder only to welcome him back to rescue the ship from doom (e.g. Steve Jobs).

Ultimately, Peter is to be applauded for essentially recommending that small firms should be allowed to retain all their staff as self-employed individuals. This would allow for the rapid expansion of a business around an entrepreneurial concept as it emerges, rather than straining its resources and strangling it in red tape before it has a chance to discover whether the concept will 'fly'. Of course, firms could still choose to offer employment to staff where that is necessary in order to compete in the labour market. But given the healthy, inevitable failure of most small firms within 5 years, and the inability to predict the winners, it seems pointless to require all of them to grind through the cost and admin involved in creating and maintaining the employment relationship.

When Will Control Truly Shift To The Consumer?

For those engaged in the process of empowering consumers, 2012 is already a fascinating year. So it was timely that a bunch of us met at Ctrl Shift's "Explorer's Club" to try to map the timeline for when 'customer relationship management' truly inverts and firms finally acknowledge their customers control them. 

The output of the session is being converted into an 'infographic' that will be available as a reference soon. In the meantime, here's an excellent drawing that Joel Cooper produced during the session to reflect the various themes: