Have our universities lost their purpose and become value extractors?

It was reported on the BBC this morning that fewer than two in five students think they are getting value for money from their courses. This is based on a survey of 14000 students. The students want more teaching time. They want more contact with the teachers in return for their £9250 a year.

York University - Value Extractors

Graduates outside the university library at York

What is going wrong?  One response was quite alarmingly complacent. The spokesman said that things were getting “better” as 38% of students were satisfied with the value for money vs 35% last year. This is a statement that seems to miss the point about the 62% who are dissatisfied.

This reminded me of my son’s recent experience at York University and his reaction to what he was offered and how the institution related to him. He liked his teachers, he wanted more input from them. He received about 5 hours a week input. But he felt the university was more preoccupied with new buildings and a massive plan to expand the capacity of the university. Today the Universities Minister Sam Gyimah, warned universities about generating courses just to put bums on seats

My son also noticed the very high salaries paid to the top management who remained invisible to students and he felt did not contribute much. (The vice chancellor received £293,000 last year, so it needs 32 students fees cover this alone).

So what is wrong? Why are so many students dissatisfied or frustrated? I wonder if the government and the new professional management has created a whole new breed of value extractors who have lost sight of the purpose of the universities. The focus seems to have shifted from quality research and education to expanding the numbers and generating income to fund the expansion.

I believe the future value of our universities is the research they do and education they provide to students. Both of these are a public good that benefits the whole of society. This is their purpose. The fact the students report dissatisfaction with the education should be a major cause for alarm. The students have pointed to one thing that would raise quality and that is more contact time.

My daughter had a different experience at Cambridge. The students at Oxford and Cambridge are more satisfied as they get double and treble the contact time offered by other universities. This is largely funded by Alumnae grants and donations. But again their higher satisfaction indicates that contact time matters.

My definition of value is based on what value the universities add by what they do, the research and education. This is very different from the value definition provided by ministers and the universities. This is just about the price that students can charge for themselves when they leave. The value is about the higher earnings that the students will enjoy in later life. Interestingly, the Institute for Fiscal studies is going to produce a report on how different courses and universities deliver on this.

This distinction is important.  A value-adding brand or organisation starts by focusing on its purpose which should be based on what it can do to help its customers (in this case teach them well). A value extracting approach just looks at the numbers and says what is the least I need to put in to get the highest price and quickest return.

The problem for the value extractor is that the customers tend to rumble what they are up to and look elsewhere. There were 4% fewer applicants for university places in 2017.  In contrast, a value adder attracts more customers and keeps the ones they have. They create long-term value.

I hope our universities are paying attention, we need them to work for our country.

What is the purpose of business? (part 1)

What is the purpose of business

Photo by rawpixel on Unsplash

In business “purpose” is initially expressed in terms of making a profit or maximising shareholder value. Business is considered a purely financial entity. Is that right or should a business do more than that?

Maximising shareholder value was the defining objective for many business leaders and became very popular with top business executives in the 80’s and 90’s. Later it was then criticised for making businesses focus just on the short-term results demanded by Wall Street and The City.

There has also been much discussion about businesses having a purpose beyond money. Some people argue that business needs this. Paul Polman of Unilever talks about the idea that businesses must create long-term value. To do this Unilever has a 10-year sustainable living plan focused on environmental impact, removing gender bias, ensuring suppliers are sustainable, caring about public health and nutrition. Even though these initiatives may not maximise short-term returns, they will ensure Unilever creates long-term value. So, in the end, Paul Polman provides a financial justification.

Some brands convey they have a purpose beyond money. Disney defines itself as existing to “Create Happiness” Sony talks about “providing customers with “Kando” (i.e. to move them emotionally – and inspires and fulfils their curiosity). This influences everything they create and do. This kind of mission and purpose is designed to ensure their products and services will attract customers, that they can motivate and attract staff and the business creates real value for customers, staff and shareholders.

There are agencies set up to help brands find their purpose and use it to transform their business and go beyond just profit and financial goals e.g. Purpose, Caffeine, Brand Pie.

My friend Simon Tuckey talked to me yesterday about the fact that the reputation of corporate business with the wider public is at an all-time low. Business leaders need to address this and one way to do that is to demonstrate how the wealth they create and the activities they perform help to the wider community through finding another layer of purpose.  This could be supporting charities or local community initiatives or new business initiatives that are seen to contribute (add value) rather than just take (extract value) from society.

I have struggled with much of this discussion about purpose. On the one hand, having a purpose that is not just financial makes sense and is intuitively attractive. I have long thought that businesses are like people. We all know as individuals, if we purely behave selfishly, we find it harder to achieve what we want. One aspect of this is that people with purpose are usually more attractive and are more likely to attract followers than people who seem to have no purpose and just drift.

For a business entity, similar rules apply, if they solely behave selfishly and purely financially then it defeats the goal to maximise financial returns. Then customers turn away, people do not want to work for them and this means investors find the investment less attractive. As a result all businesses, to differing degrees, invest in their reputation with customers, programmes to attract and reward and care for staff and programmes to manage and enhance their corporate reputation.

But businesses are selfish, financially motivated entities which have to perform financially to survive. So sometimes, this discussion of purpose can get out of control. I believe that businesses should not distract themselves with a purpose that is not connected to its financial purpose, nor one that is unrelated to the core activities.

Business must have a purpose that is financial. Paul Polman alluded to this when he says that he wants to create long-term value

My next post (part 2) will describe why this matters and how this works.

What we measure matters – how to measure value?

I talk a lot about value adders and value extractors. This distinguishes between those organisations and brands that create value for customers vs those that focus on extracting as much value as possible from existing customers.

I just finished reading Mariana Mazzucato on The Value of Everything. She is an economist who discusses the idea of value creators and value extractors and applies it to the wider macroeconomic context.  She looks at how classical economists like Adam Smith and Marx defined what creates value for the economy and contrasted this with those who extract rent or value from the economy. They identified producers who create things and create value e.g. a factory making cars) vs those services or extractors who just extract value or rent from the surplus profit that was made by the producers (e.g. the bank, the lawyers, the landlord). This implies value is created by creating something.

Mazzucato then explains how neoclassical economists have changed our assessment of value so now we don’t make this distinction. Now measurement of value now purely looks at what someone is willing to pay for something. That price defines its value and its contribution to the economy.

Mariana Mazzucato The value of everything

GDP used to use at the classical view and reflect the value of what is produced. Now neoclassical view prevails and GDP measures value purely on the basis of price and what people pay for things and not what an investment actually does or what goes into it.

So GDP includes banking, asset management, investment banking but excludes government investment in valuable infrastructure, education and healthcare. This government investment has no price and is treated as a cost. The value of this government investment is excluded from GDP.

Yet these investments are essential so that the producers, the tech firms, the banks and others can go about their business. Mazzucato points out that many businesses that claim to have created value, could not have done so without massive government investments in infrastructure, internet and science research.

The implication is that GDP overestimates the value of some services such as asset management and investment banking and underestimates the value provided by governments. She then goes on to criticise many financial services firms for the methods they have used to extract value. She demonstrates they have been so brilliant at extracting value that they have not had to make any productivity gains in the past 50 years. In the meantime government and producers have been consistently making productivity improvements under pressure from limited tax revenues or intense competition.

Mazzucato goes on to argue one of the problems is what we measure. If GDP were measured differently then we would make different decisions about how to grow the economy, we would value production and the provision of valuable consumer services and government investment more highly than we do now. And we would place less value on industries and businesses that extract value.

I took three things from this.

  1. It matters what we measure, it affects our decision making
  2. What businesses need to do is create real value for their customers, it is the engine of growth, it is the engine of profit
  3. Real value comes when you provide something that solves a problem or address a need for your customers.

There is quite a bit more to this argument and I will be discussing this in future blogs

To attract customers – be available in all channels

Robert CrowderLast night I was having a discussion with Robert Crowder who is the chairman of SkiClub GB and owner of Crowders Nurseries and www.crowders.co.uk.  We were talking about retail and the role of e-commerce for garden centres in particular.  Robert reminded me of such a simple truth that to maximise growth opportunity it is essential for the product and service to be available in as many channels as possible. Especially channels that are growing like e-commerce.

Being in the right channels

This morning Robert sent me these quotes as follow up to our discussions.  This is from today’s trading update from the Chairman of the John Lewis Partnership:

Charlie Mayfield John Lewis“Although we expect to report profits up on last year, trading profit is under pressure. This reflects the greater changes taking place across the retail sector. We expect those to quicken, especially in the next 12 months as the effects of weaker Sterling feed through. We will now accelerate aspects of our strategy. This will involve a period of significant change, investment and innovation to ensure the Partnership’s success.”

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Pensions firms will they attract and educate or just extract?

Rob Gardner RedingtonRob Gardner of Redington has just thrown down a challenge to the Pensions industry. click here. His quote (below) is in response to the success of Auto Enrolment.  Auto-enrolment is handing a whole new batch of customers to pensions firms.  Will the firms lean forward and seek to help these customers with great products and advice that help them secure their retirement.  Or will they just take this new crowd of customers and work out how much money they can extract from them.

 

 

Rob puts it differently in his article in Pensions Expert

For the first time in decades, we have a captive audience of pension savers. We could do what we have always done and hope some of it sticks. Or we can take up the challenge and recognise that the workforce of today will want to engage in a different way.

We could simply direct employers to the Pensions Regulator website, or we can start to develop communications fit for a world where Siri and Alexa capture the imagination of a new breed of savers. On the whole, the population lacks both the confidence and knowledge necessary for financial security. 2017 must be the year we really start to address this.

Redstart Financial EducationAs well as being a pensions investment consultant and co-founder of Redington, Rob is campaigner for better financial education (Redstart) so we can all create a more secure financial future for ourselves.

Disrupt, produce, fulfil – boosting productivity

From time to time I go looking for events where I might learn something new and get a different perspective.  I also try to combine going to these events with meeting a friend, so we can discuss the subject.  The LSE provides some great events and attracts interesting speakers.  I try to avoid famous politicians as they tend to only say what we have already heard.  I look out for people with expertise and something to say.  Especially if it is about something I know little about.

Timothy Massad Chairman of CFC

Timothy Massad with President Obama

Last night I went to hear Timothy Massad who has been on the front line of the U.S. effort to combat the financial crisis and reform the international financial regulatory system. He was appointed by President Obama as Chairman of the U.S. Commodity Futures Trading Commission and was formerly as Assistant Secretary for Financial Stability at the U.S. Treasury. However, President-elect Trump will replace him as is customary with a new president.

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Attract don’t Extract

attracting customers employees shareholders

I have spent all my working life believing that when organisations serve customers better and seek to help people, then they do better than organisations who just want to extract money from people. When I started work in 1979 it took me some years to realise that my view was not always shared by those whom I worked with.

I worked in marketing in food and drink (initially biscuits, then chocolate and then soft drinks). I saw my role as being to help the organisation to

  1. find out what matters to customers
  2. make products better by creating things that solved problems for people
  3. ensure products were profitable
  4. ensure products were available in the right places
  5. run marketing campaigns to let everyone know about them.

As a result, we would get more sales and customers would keep coming back.

Now 38 years later, I still think business is that simple. It is simple to understand. The challenge is to work with the people, the finances and the products to do it. This is the primary role of a business owner, a marketer or a CEO. This is what will attract more customers, grow profitable sales and maximise value for shareholders.

We were frequently told our job is to maximise shareholder value. For the management team that meant hit the quarterly numbers and ensure the company could pay dividends.

Maximising shareholder value

For me, maximising shareholder value means being more attractive, more visible and more available to more customers. But this costs money, so I kept running into people who were worried about adding cost to products without a guarantee of extra sales and were sceptical about the benefits of marketing spend when profits were under pressure. So for others maximising shareholder value was about cost control and financial management. The customer could easily get lost in these financial discussions.

Sound financial management and cost control are essential for success. But quite quickly financial discussions can start to view the customers as a target that we should extract more money from for the benefit of the shareholders. The discussions are about capturing loyal customers, seeing how far we can push up prices, how low can take the product quality. This mindset is an extractive mindset and not an attractive mindset.

Industry disruptors

What I have observed over the intervening years is that the best businesses are those that have the best reputations. This is linked to the most enduring growth and profit performance. They all start with great products that solve a problem for people. The are dedicated to better products. This is particularly true of industry disruptors

  • Easyjet disrupted European air travel with better flights (and cheaper ones) they made it easier to book and easier to travel. (Maybe they are becoming more extractive now they are more corporate)
  • First Direct created bank accounts where every customer is left feeling totally taken care of
  • Hiscox created insurance that pays out when you need it, with great claims handling and protects what you need
  • Uber created taxis you cn get hold of when you need them with no effort
  • Miracle Gro created gardening products that make it easier to
  • Dorset Cereals reversed years of cereal manufacturers engineering cheaper products with cheaper ingredients
  • Hotel Chocolat now fill our high streets with chocolate shops where Thorntons used to dominate
  • Redington did it for pensions investment management and have helped trustees to reduce and eliminate pension fund deficits

The attractive mindset knows that the business can only grow by attracting more customers.

Align shareholders, employees and customers

There is a commonly held belief that the interests of customers shareholders and employees are at odds with each other. This suggests there is a conflict between them

  • Shareholders want to give the customers less and charge them more
  • Employees want to work less and get paid more
  • Customers want to pay less and get more

This conflict does exist when you have an extractive mindset. My experience is the best businesses do not suffer from this conflict and the reason is that have an attractive mindset

Better products sell more and customers are very happy to pay higher prices for them. Prosperous growing businesses are fun places to work and attract better people. When the business seeks to attract more customers and seeks to attract better staff, this results in a virtuous circle of growth. When a business is working out how to extract more money from customers and get more for less from their staff, the business enters survival mode.

This blog and all my future posts are about observations on how this works, when it works, examples of it working and lessons we can learn from them. These lessons of the attractive mindset can be applied to business organisations, charity fundraising, political campaigns, club memberships or any organisation that exists as a group of people trying to get things done.

This is a hybrid of a campaign for better business and a series of practical insights you can use to make your organisation or business perform better.

I hope you will join me for the ride.

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Attracting more customers vs extracting more money from the ones you already have

Value adders vs value extractorsDo you believe that this is true?

“No-one ever achieved significant growth in their business without attracting additional customers”

The need to attract new customers underpins everything I believe is important for businesses and organisations who want to grow. Attracting more customers is something that all business leaders should consider every day. Attractive Thinking is the key to unlock your maximum growth potential.

Attracting new customers matters

This is because you cannot get significant growth by just selling more of what you have to your existing customers.

Really? So how can we be sure it is true that you cannot get significant growth just from increased spending from existing customers? Well, there is a large body of evidence based scientific research that demonstrates this is true. This research was kicked off by Professor Andrew Ehrenberg in the 1960’s and has been continually updated and expanded by the Ehrenberg-Bass institute under the leadership of Professor Byron Sharp (@byronsharp). You can read a summary of the research, its implications and the resultant scientific “laws of marketing” in Byron Sharp’s book “How Brands Grow”. The work of Ehrenberg Bass is now sponsored by over 100 global brands who study their work to glean insights about how to grow their business.

My own Attractive Thinking article is about the five questions you need to answer if you want to attract more customers. Download here The article goes beyond the Byron Sharp insights and provides a practical framework on how you can attract more customers. This is a better way to get growth than extracting more money from them.

What if chief executives focused on helping their customers solve a problem? And then used their insight to create products and services that customers are attracted to and really help customers. This would make for a much better world than businesses who just focus on how much money they can extract from customers. When businesses do this

  • They get more growth
  • They are a happier more creative place to work
  • Have happy more loyal customers
  • They get more referrals

Simpler approach to tax and money benefits everyone

In the video below, Martin Wolf describes an alternative financial system that would work in the public interest and encourage the right kind of risk-taking. This kind of radical financial thinking is what we need. We certainly need to stop believing what the wealthy tell us who have a vested interest in the current system.

The focus on simplicity and transparency is similar to some tax ideas I put on Twitter yesterday. In a nutshell, politicians should stop trying to incentivise our behaviour through complex tax reliefs and should run a much ‪#‎simpler‬ ‪#‎fairer‬ ‪#‎transparent‬ ‪#‎better‬ tax system.

As an example abolish all the current tax reliefs and abolish National Insurance switch to

  • £20K tax-free income threshold for people,
  • 40% flat rate income tax on people,
  • 5% income tax for local authorities
  • 5% revenue tax on businesses
  • a flat rate 15% VAT on consumer purchases.

This then stops all the tax avoiding behaviours because there is nothing to avoid. There is no pension tax relief, no mortgage interest relief, no eis. Then people will behave in their own best interests and not to avoid a tax. I am sure the economy would work better.

Martin Wolf understands the financial system better than me and explains it here

 

Why is it that large institutions dehumanise us?

I was at an event on Monday, where I got some insights on the role of government and large institutions in defeating poverty.  I left with a strong sense that achieving this task is inhibited by the way large government and business institutions don’t work for people. This article sets out preliminary thoughts.  Answering the question will take longer than is possible here.

This was a Tory conference fringe event organised by Tim Montgomerie of The Good RightThe event hashtag was #defeatingpoverty.  This featured four government ministers discussing their ideas on how to reduce poverty, increase social mobility and expand opportunity.  This may seem ironic to some, since Michael Gove, Sajid Javid, Ian Duncan Smith and Ruth Davidson are frequently attacked by the left for doing things that achieve the opposite of these aims.  

But I discerned a theme underlying all their ideas.  It is clear they do believe in #defeatingpoverty.  But these four ministers have a distinctive take on how to do it.  They each believe that it is not the government’s job to provide us with everything we need and give us the money to get out of poverty, but their job is to provide us with the tools we need to help ourselves.  The most valuable things the government can do is to provide education, an economy with jobs, healthcare, housing, public transport, infrastructure and essential utilities.

Now, that could easily have been said by many Labour politicians as well. 

Conservatives and Labour have similar goals but believe in very different means

It is interesting that if you listen closely to both left and right-wing politicians and dig into their remarks, the surprising thing is they both seem to want similar outcomes.  What they disagree about is, what is the best and fairest way to get there.

But the media prefer disagreements to agreement.  Agreement does not make good politics and does not make good media.  So what happens in the media debates and interviews is that this common aim is obscured and missed and the discussion concentrates on the means to get there.  These debates tend to focus on how each side has different means to get to the aim rather than revealing the common ground and purpose. 

Labour_1592957cLabour argue that the conservatives do not understand what it is like to be poor and disadvantaged.  The Conservatives just look after their rich friends and the tax and business policies are evidence of how the conservatives are nasty, self-interested and unfair.  Austerity targets the poorest and the rich thrive.

Conservative_logo_2006.svgConservatives argue that Labour ideas are too expensive, we cannot afford them, that they remove the incentive to work, they do not celebrate excellence and suppress individual initiative and enterprise.  Labour policies are prone to create higher tax and spend, reduce our competitiveness and depress growth which creates more poverty.

Now I know that the arguments from each side are more nuanced and go into greater depth than I have done here.  But if you dig deeper into the speeches from each side you will find that there is a commonality of aim but a disagreement about means. 

Because they favour different means, when describing aims, they each use different language.  The Conservatives talk about opportunity, family, jobs, growth, choice, excellence.  Whilst Labour discuss fairness, social justice, jobs, public ownership and control, growth.  Each side emphasises these because they each believe they are the most important means to reduce poverty, increase social mobility and expand opportunity for all not just a privileged few.

The_Good_Right_Cover2So whilst it seemed odd to some people that the Tories should hold an event titled #defeatingpoverty, for me it is not bizarre at all.  The Good Right within the Tories is a subgroup that champions this purpose.  It is great to see this as an aim expressed clearly within the party

But if the both Labour and Conservatives agree about the aim, who has the right answer on the means to achieve the aim?  The Conservatives or the left-wing alternatives?

The left argue that the market punishes the weak and the only way to fix this is through collective action by government and government taxation.  This is the best way to help the weakest and to lift them out of poverty.  The right argues that the dead hand of government suppresses initiative, creativity and enterprise and business is better suited to many tasks.  But in my view both of these arguments misunderstand the nature of large-scale institutions and the way they do and don’t work.

Large institutions are letting us down 

After Thatcher, it was generally accepted that government-run organisations and businesses are not efficient or effective at many tasks and they should leave many things to the private sector.  Business does it better goes the argument.

But in the 21st century we have increasingly seen that it is not just government run organisations that can fail but many badly run, inhuman organisations of all types from business, government and not for profit sectors.  In fact in many areas, the government do things better.  (There are great hospitals, schools and transport services that show this).

We have recently seen a number of dramatic examples of institutions that do not serve the people they exist to serve.  If we want to help people lift themselves out of poverty or help them get anything else done, then we need to address the way our larger institutions are not working for people or to help people.  I would highlight three areas of concern 

1. When people go to work in large institutions of business, government or charity they can lose their humanity and their talent to be people

1-compressed-300x200Steve Hilton wrote about this in More Human and analysed it in many different fields   

Something strange happens to people when they cross the portal of their workplace each day.  They lose some of the skills they naturally have at home and with their friends.

I frequently observe that people in their personal lives understand how to flourish and understand how to interact with people, so they connect with others, are active in their lives, take notice of what happens, keep learning and find ways to give.  But as they go to work they feel they are not allowed to do this and they stay within their job descriptions, are constrained by rules and remain in their silos at work.  At its worst they develop a sense of entitlement. 

This is manifest in all levels at work from the customer service handler who cannot help the person on the phone, to the executives at Volkswagen who thought they could cheat the government and the public for 10 years, to the bankers who have lost sight of their purpose to serve customers,  the charities who bamboozled older donors into giving more money.  There are news stories every week and we all have experiences of dealing with institutions and being frustrated, horrified and indignant.

2.  Large institutions and government favour single national solutions.  But single national solutions to do not encourage the development of creative, innovative ideas.  They tend to suppress initiative. 

Even though everyone loves the idea of it, the NHS is now a monster that we cannot control and most worryingly many staff are very disheartened, frustrated and just want to leave even though they love looking after people. 

The history of state-funded education since 1975 has been pretty disastrous under both Labour and Conservative governments.  And again we see that many teachers feel like the NHS staff.  They are disheartened, frustrated and just want to leave even though they love young people and love their subject. 

Large businesses very rarely create great innovation from within.  However, they have come up with a solution.  What they do is wait for smaller businesses to come up with stuff and then acquire the smaller business and apply their investment and systems to scale it and grow it.  But in this solution the innovation and fresh thinking happens elsewhere away from the larger business.  There are a few examples that contradict this, but they usually involve one extraordinary individual (e.g. Steve Jobs, Richard Branson, Larry Page, Bill Gates) who operates like a small business owner but with big business money.

3.  The welfare state focuses on what people are not or don’t have rather than what they can do or might achieve.

Alex-SmithAlex Smith has written about how the welfare state has provided a safety net and done many great things, but there has been an unfortunate side effect.  It addresses what people have not got and what they cannot do.  It treats those it helps as dependents.  It has led many of those who depend on it to become disconnected, inactive, have narrowing horizons, and a sense of entitlement.  It is disempowering them and creating an environment that discourages initiative and self-help.  Whereas people flourish when they connect, are active, take notice, keep learning and find ways to give.

Click here to read more

So my title question was:  Why is it that institutions dehumanise us?

In this article, I have written about why I think this question is important. I have not answered it yet.  I will follow this up later.  I will also go on to discuss why this matters to business when they create products and services that aim to attract more customers.

What priorities were discussed at the event?

I was inspired to write about these issues due to the debate at the Good Right event on Monday.  It is not directly what was discussed, but it was implied in the ideas that we explored.  My takeaway from the event was that I feel that I side with the Good Right in believing it is more important to capture the human spirit and our capacity to innovate than to equalise the outcomes for everyone.  

Something that matters a lot to me is that all politicians should support the aim to defeat poverty, develop social mobility, build social justice and create opportunity

The team last night highlighted five areas that must be the priority for a government that wants to achieve these aims.  These are things that will help us to help ourselves.  These are the priorities for the government institutions

  • Build more houses
  • Provide better education
  • Have effective healthcare
  • Building national infrastructure
  • Have a growing economy

Tim MontgomerieThank you to Tim Montgomerie and the team at The Good Right and the Legatum Institute for provoking me to write about this and providing a lot of the stimulus material.  You can see more by clicking on the links