When Public Outperforms Private in Services – By Eduardo Porter

The remnants of a BP refinery in Texas City after a 2005  explosion. BP had a string of accidents following its privatization.  William Philpott/Agence France Presse — Getty Images

Few corporate sagas capture the virtues and vices of state-owned companies and private enterprise better than the drama of BP’s roller-coaster ride between failure and success.

Ten years ago, BP was the darling of the energy world — the unprofitable duckling transformed by privatization under the government of Margaret Thatcher into a highly profitable swan.

The London civil servants of the 1960s and ’70s who all but ignored profitability as they issued directives across British Petroleum’s bloated corporate network were replaced by highly motivated managers who were rewarded for cutting costs, reducing risk and making money. The company’s more incongruous businesses — food production and uranium mines, for instance — were sold. Payroll was cut by more than half. Oil reserves jumped. The time it took to drill a deepwater well plummeted. Profits soared.

But then, in 2005, a BP refinery in Texas City blew up, killing 15 and injuring around 170. In 2006, a leak in a BP pipeline spilled hundreds of thousands of gallons of oil in Prudhoe Bay, Alaska. And in 2010, an explosion on the Deepwater Horizon oil rig killed 11 and resulted in the biggest offshore oil spill in the history of the United States. These days, BP’s stock trades about 25 percent below where it was before the disaster off the coast of Louisiana, about the same place it was a decade ago.

BP’s bumpy ride is recorded in “The Org: The Underlying Logic of the Office,” a compelling new book by Ray Fisman, a professor at Columbia Business School, and Tim Sullivan, the editorial director of Harvard Business Review Press. “The Org” aims to explain why organizations — be they private companies or government agencies — work the way they do.

The book offers telling insight on a topic that has ebbed and flowed across the world over the last 30 years, as governments of all stripes have set out to privatize state-owned enterprises and outsource services — what does the private sector do better than government, and what does it do worse? Long dormant in the United States, the debate has acquired new urgency as governments from Washington to statehouses and city hallsaround the country consider privatizing everything from Medicare to the management of state parks as a possible solution to their budget woes. One of the authors’ chief insights is that every organization faces trade-offs — inherent conflicts between competing objectives. The challenge is to manage them. This is way more difficult than it sounds.

While in government hands, British Petroleum paid too little attention to profitability, constrained by its need to please elected officials who often cared more about keeping energy cheap and employment high. But in private hands, it may have cared about profits far too much, at the expense of other objectives. “BP veered from being a company that made sure nothing blew up to one focusing on cost-cutting at all costs,” Professor Fisman said.

The success or failure of an organization often depends on whether it can clearly identify its goals and align the interests of managers and employees to serve them. Yet whatever reward structure an organization picks can skew incentives in an undesirable way.

“The Org” tells us of the sociologist Peter Moskos, who joined the Baltimore police force to study police behavior. The police hierarchy demanded arrests, so police officers arrested people: 20,000 in one year in the Eastern District alone, out of a local population of 45,000. One officer set a record by locking up people for violating bicycle regulations. Unsurprisingly, perhaps, Baltimore’s murder rate continued to climb.

“The more we reward those things that we can measure, and not reward the things we care about but don’t measure, the more we will distort behavior,” observed Burton Weisbrod, a professor of economics at Northwestern University who was a pioneer in research on the comparative behavior of nonprofit institutions, corporations and government organizations. As Professor Fisman and Mr. Sullivan put it: “If what gets measured is what gets managed, then what gets managed is what gets done.”

Rewarding teachers for how well their students perform on standard math and reading tests will encourage lots of teaching of reading and math, at the expense of other things an education might provide. Private prison operators who bid for government contracts by offering the lowest cost per inmate will most likely focus on cutting costs rather than tightening security. Unsupervised apple pickers who are paid by the apple will probably pick them off the ground.

This insight is important to the debate over the competence of public and private organizations because it underscores a significant difference in how they meet their goals. Profit is one of the most potent incentives known to man — a powerful tool to align managers’ interests with corporate goals. But it also has drawbacks. With earnings as the overriding, nonnegotiable priority, private enterprise often has little wiggle room to handle the tension between conflicting objectives.

There are instances in which privatization can help achieve broad social goals. After Argentina privatized many of its municipal water supply systems in the 1990s, investment soared, the network expanded into previously underserved poor areas and the number of children dying of infectious and parasitic diseases tumbled. (Most water companies were nonetheless renationalized by a later government.)

Still, our recent memory of mortgage banks blindly offering risky mortgages to shaky borrowers and bundling them into complex bonds to sell to unwary investors should dispel the notion that the profit motive inevitably aligns incentives in a socially desirable way.

The pursuit of financial rewards, by private companies or even nonprofit organizations, can directly undermine public policy goals.

A recent study found that private universities and colleges collect higher fees from poor students who receive Pell Grants, absorbing over half the value of federal aid. Public colleges, by contrast, do not discriminate against those who get aid.

This suggests a good rule of thumb to determine when a private company will outperform the public sector: if the task is clear-cut and it’s possible to define concrete goals and reward those who meet them, the private sector will probably do better. “If I can write a perfect contract in which I pay for a concrete observable outcome, can rule out cream-skimming and can ensure the measure is not gamed, there is no reason that the private sector can’t do it better,” Professor Fisman said.

But if the objectives are complex and diffuse — making it difficult to align profit with goals without undermining some other desirable outcome — the profit motive could well make conflicts more difficult to manage. In these cases, privatization is probably not the best solution. In their rush to save money by outsourcing services, governments might forget that.

E-mail: eporter@nytimes.com;

Twitter: @portereduardo

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This column will change your life: interestingness v truth – by Oliver Burkeman

‘Even in the world of academia, most people aren’t motivated by the truth. What they want, above all, is not to be bored’

 

This column will change your life: interestingness v truth

‘If you care about the truth, interestingness can mislead.’ Illustration: Jean Jullien for the Guardian

Do you long to become a “thought leader”, thinkfluencing your way from TED talk to tech conference, lauded for your insights? I hope not. But if so, you could do worse than consult a paper published in 1971 by the maverick sociologist Murray Davis, entitled “That’s Interesting!” (I found it via Adam Grant.) What is it, Davis asks, that makes certain thinkers – MarxFreud,Nietzsche – legendary? “It has long been thought that a theorist is considered great because his theories are true,” he writes, “but this is false. A theorist is considered great, not because his theories are true, but because they are interesting.” Even in the world of academia, most people aren’t motivated by the truth. What they want, above all, is not to be bored.

Forty-three years on, this feels truer than ever. We live in the Era of Interestingness: attention is money, and purveyors of the interesting can make millions from Twitter feeds of amazing facts – even if they’re not always true facts – or from books or blogs offering intriguingly counterintuitive perspectives. (This column’s part of the problem, except I’ve yet to make millions.) Moreover, Davis argues, there are only a handful of main ways for an idea to be interesting. To grab people’s attention, you should argue that something we think of as bad is good, or vice versa; that some apparently individual phenomenon is really collective; that several seemingly disparate things are actually part of the same thing; and a few others. It’s unnerving how many thinkers can be pigeonholed this way. Christian morality seems good, Nietzsche argued, but really it’s bad. Mental disorders, dreams and slips of the tongue might seem unrelated, Freud said, but really they’re the result of the same inner drives. And on and on.

Clearly, this could be helpful information if you’re looking to intrigue friends, fascinate a potential lover, or keep your students engaged. But it’s also troubling. If you care about the truth, Davis suggests, interestingness can mislead. That new book on how to get fit – or raise happy children, or invest your savings – caught your eye because it’s interesting. But is it true? (In science, this helps explain the “file drawer effect”: studies with interesting conclusions get published; boring ones, however true, get locked away.) Ultimately, interestingness is a form of excitement, and we all know how excitement can lure us off course: consider the thrill of an extramarital affair, or of driving at 120mph. But it’s intellectually respectable excitement, so it doesn’t ring alarm bells.

Perhaps it should. When he gives talks, the spiritual author Eckhart Tolle likes to warn the audience that they may not find the experience interesting. He’s not simply lowering expectations. He means that constantly to chase after what’s interesting is to miss something crucial about life. Interestingness gives the mind something to chew on – but the best experiences come when you stop chewing. When you’re watching a stunning sunset, Tolle asks, “could you say, ‘This sunset is interesting’? Only if you were trying to write a PhD about sunsets… Truly look, and then what you’re looking at goes beyond interesting… There’s nothing interesting about it, and yet it’s awe-inspiring.”

My first reaction to that was, “How interesting! I must explore this topic further!” which just shows how addictive interestingness can be. The correct reaction, obviously, is to go and watch the sunset.

oliver.burkeman@theguardian.com
The Guardian, Saturday 5 April 2014

All Economics Is Local – By Michael Reich and Ken Jacobs

In the face of congressional inaction, the debate on raising the minimum wage is moving to the local level. As more cities and counties consider setting their own wage standards, they can learn from the policy experiments already underway.

Since the mid-1980s, states in every region of the country have raised the local minimum wage, often numerous times. Twenty-one states (and Washington, D.C.) currently have wage floors above the federal level ($7.25), and 11 of these raise them every year to account for inflation. Washington State currently has the highest, at $9.32; California’s is set to increase to $10 on July 1, 2016.

More than 120 cities and counties have adopted living wage laws that set pay standards, many of them in the $12 to $15 range. These higher standards usually apply only to employees of city service contractors, like security guards, landscapers and janitors. In some cities, living wage laws cover workers at publicly owned airports or stadiums, as well as at shopping malls subsidized by local development funds. While the impact on the individual workers covered under these laws is often quite significant, their reach is rarely broad enough to affect the local low-wage labor market as a whole.

For this reason, cities and counties are now enacting higher local minimum wage policies that cover all work performed in the area. Cities as varied as Albuquerque, San Francisco, San Jose, Calif., Santa Fe, N.M., and Washington, D.C., have minimum wages ranging from $8.60 in Albuquerque to $10.74 in San Francisco. The District of Columbia, which is raising its minimum wage to $11.50 in 2016, wisely joined with two neighboring Maryland counties to create a regional standard.

Many more cities are getting ready to follow suit. Richmond, Calif., Oakland and Seattle are seriously considering setting their own minimum wage. The Richmond City Council just voted an increase that will go to $12.30 by 2017. Advocates in Oakland are aiming for $12.25. Seattle is discussing $15. Prodded by its new mayor, New York City is seeking the right to set its own minimum wage rate, instead of using New York State’s.

A Seattle group held a march last Saturday calling for raising the minimum wage to $15 per hour.
Stuart Isett for The New York Times
A Seattle group held a march last Saturday calling for raising the minimum wage to $15 per hour.

With the national debate stuck in the same old rut, states and cities have again become laboratories of democracy. Are they on the right path? For the last 15 years we have been doing research on just this question.

One city we have studied in detail, San Francisco, has passed a dozen labor standards laws since the late 1990s. After adding the effects of other local laws mandating employers to pay for sick leave and health spending, the minimum compensation standard at larger firms in San Francisco reaches $13. Our studies show that the impact of these laws on workers’ wages (and access to health care) is strong and positive and that none of the dire predictions of employment loss have come to pass. Research at the University of New Mexico on Santa Fe’s floor (now $10.66) found similar results.

These are not isolated cases. Research on the effects of differing minimum wage rates across state borders confirms the results of the city studies. But how can minimum wage increases not have negative effects on employment? After all, according to basic economic theory, an increase in the price of labor should reduce employer demand for labor.

That’s not the whole story, though. A full analysis must include the variety of other ways labor costs might be absorbed, including savings from reduced worker turnover and improved efficiency, as well as higher prices and lower profits. Modern economics therefore regards the employment effect of a minimum-wage increase as a question that is not decided by theory, but by empirical testing.

Our research and that of other scholars illuminates how businesses actually absorb minimum wages at low-wage industries. Higher standards have an immediate effect in reducing employee turnover, leading to significant cost savings. Minimum wage increases do lead to small price increases, mainly in restaurants, which are intensive users of low-paid workers. How much? A 10 percent minimum wage increase adds 0.7 cents on the dollar to restaurant prices. Price increases in most other sectors, like retail, are too small to be visible, partly because retail pays more than restaurants.

Even if Congress finally acts to raise the federal minimum wage, higher standards at the state and local level still make sense. It will surprise no one that living costs are generally higher in cities than in rural areas. They often vary among cities in the same state. The New York City metro area is 26 percent more expensive than upstate Utica; costs in the San Jose metro area are 30 percent higher than in El Centro, in southeastern California. Policy makers need to take these variations into account. This is not just a theoretical idea. It has long been policy in Japan. Minimum wages in Tokyo and Osaka are as much as 30 percent higher than they are in regions with the lowest cost of living.

Here’s another way to think about it. One measure of employers’ latitude to absorb higher wages compares the minimum wage to the median wage. From the 1960s into the 1970s, the minimum-median ratio in the United States varied between 41 and 55 percent. Since the mid-1980s, it has been much lower, varying between 33 and 39 percent. A minimum wage increase to $10.10 by 2016, as President Obama proposed earlier this year, would restore the national ratio to 50 percent. By comparison, San Francisco’s $10.74 minimum wage is 40 percent of the city’s median wage. In other words, although some of the proposed rates may seem high by national standards, they look more reasonable when measured against local wage levels.

Local minimum wages also represent a response to growing inequality within cities, in too many of which a growing army of low-paid workers — maids, gardeners, janitors, restaurant and security workers — provide personal services to an increasingly well-heeled minority.

The record is clear. Employers can afford to pay higher wages that raise families out of poverty and bear a closer relation to local living costs. And there’s a moral value, too. An increase in the local minimum wage restores, on a very personal level, some of our notion of fairness.

Michael Reich is a professor of economics at the University of California, Berkeley, and the director of the Institute for Research on Labor and Employment; Ken Jacobs is the chairman of the Center for Labor Research and Education at Berkeley; together with Miranda Dietz, they are the authors of “When Mandates Work: Raising Living Standards at the Local Level.”

Why Work Is Lonely – by Gianpiero Petriglieri 

I have a name for this cocktail of deference, conformity and passive aggression that chokes people and teams. I call it violent politeness.

I have witnessed it countless times. After some discussion, often labeled “brainstorming,” a group will go along with the most innocuous suggestion and follow it halfheartedly, keeping itself busy to avoid admitting what everyone knows: it is not going to work.

When I probe junior managers about this dynamic, they usually explain that their caution reflects their uncertain status. It feels too risky to raise misgivings, especially if one cannot offer an alternative course of action. It might make them look clueless or disruptive to their boss or colleagues.

Early in my career, I was sympathetic to that analysis. I knew it all too well, the fear of being myself at work—or more precisely, the uncertainty about which self to be.

I thought, and advised reassuringly, that things would improve with time. As young managers became established, they would have more latitude to put their mark on the roles they took—and so would I. It would be easier to find and speak with our own voice.

It took me a few years to realize that I was offering a wishful lie. Time does not summon courage. It only morphs the fear of speaking truth to power into the fear of speaking truth in power. Once I began working with senior executives, I found those hesitations all still there, only stronger in the face of increased visibility and pressure.

Owning one’s defiance feels risky at every (st)age. Speaking up feels even more exposing and consequential, spontaneity more unfamiliar, when we’ve spent much of our careers learning to modulate our silence—and being rewarded for it.

This is why violent politeness often gets stronger the closer one gets to the C-suite. In too many organizations, in too many of our minds, it is still what gets you there.

It is different from “groupthink.” It is not always borne of convenience, cowardice and backside-covering—or evidence of a lack of commitment or malicious intent.

As a personal habit, we often justify it with the wish not to embarrass others or to appear supportive. As a group norm, we reinforce it by endorsing “constructive” cultures that denigrate dissent as a lesser form of participation than enthusiasm.

Violent politeness is such an ingrained custom that we keep making excuses.

We keep forgetting that our closest relationships are not those where tension is glossed over but those where it can be aired and worked through safely enough.

We keep telling ourselves that speaking up is costly and ignoring the price of silence.Perhaps because the price of speaking up—being ignored, judged, labeled a poor team player or worse—is paid immediately and by those who speak first. The price of silence, on the other hand, is exacted later and paid by the group—when the bubble of false harmony bursts, relationships crumble or projects fail.

We keep ignoring that by censoring ourselves in order not to appear vulnerable, we are often complicit in being misunderstood. Silence is easy to fill with suspicions and assumptions about what others do not know about us.

We keep fooling ourselves that we need to wait and time will make us more open, as if time alone did anything more than harden tentativeness into superficiality. And in the meantime, violent politeness corrodes collaboration, problem solving and decision-making. It kills enthusiasm and drags learning to a halt.

We cast it carelessly, this stone that kills two birds we claim to cherish—our voice and our relationships. And when we have done it long enough that we have lost hope to speak or hear the truth, to truly care and be cared for, we tell ourselves…

It’s lonely at the top.

Of course it is, and not just there. It’s lonely everywhere you feel that you must give up your voice to stay in the room. It’s lonely everywhere relationships are brittle.

Violent politeness is tied to loneliness in a vicious cycle. Once you tolerate the former you worsen the latter, and vice versa. Neither is a property of “the top,” a necessary evil, or, worse, a badge of honor.

They are choices.

They are choices to keep commitments often made unconsciously, early on and far from any top. Commitments to look strong, caring, and in control. Commitments to keep our groups looking harmonious. Commitments we care so much about keeping that we are prepared to sacrifice learning, effectiveness, freedom, and intimacy.

It is to honor these commitments that we betray ourselves as much as others.

When I show that cartoon, most managers readily recognize themselves in the self-censoring team members pretending to agree. Few identify first with the meeting’s chairperson. No wonder. When I ask them to do so and guess how they would feel, the laughter usually stops.

Lonely, is the most common answer. Burdened, blinded, mistrusted, clueless, are frequent answers too.

Violent politeness keeps leaders stuck in the very place we say we least want leaders to be—carrying the glory if things go well and the blame if they don’t. Stressed out, alone, and handsomely rewarded for it.

Some argue that we unconsciously like it that way. Because applauding or rejecting leaders feels easier than sharing the burden of leading. Because isolation feels safer than admitting doubt or asking for help. Because at one time or other we have all been hurt by leaders who ignored us or took our dissent as an attack and retaliated.

All that may be true. But most of all we do it to keep bolstering airbrushed images of leadership and teamwork—at the expense of the messier work both take.

We can’t break violent politeness or end loneliness at the top, or anywhere else, until we are ready to sacrifice those idealized images and stop hiding in plain view. It is a tiny step that takes a lot of courage. The courage to take our work seriously and ourselves less so. The courage to be both vulnerable and generous—and to stop outsourcing shame to those who can’t afford to hide.

‘The top,’ in that way, is no different than anywhere else. We need good friends to thrive and be ourselves. Real friends, that is. The kind who would rather be ruthlessly honest than violently polite.

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Gianpiero Petriglieri is Associate Professor of Organisational Behaviour at INSEAD, where he directs the Management Acceleration Programme, the school’s flagship executive programme for emerging leaders. He also has a Medical Doctorate and a specialization in psychiatry. You can find him on Twitter @gpetriglieri.