Despite living in Australia, John Band often has more of a grip on the detail of British news stories than many people here. As he explained yesterday, the taxpayer has not been fleeced by G4s over the Olympic security contract. If anything, it will now cost the public less, thanks to the huge penalty clauses. Even if things had gone to plan, G4S was never in line to make that much money anyway. A mere £10 million, or 4 percent profit, is not much considering the risk the company was taking on.
So why did they do it? It was, as CEO Nick Buckles all but admitted yesterday, a vanity project.
Anyone who has worked in a large organisation will have come across a vanity project at some point. They are the ones that are really driven by senior management egos, though they are usually dressed up in something which looks like a commercial rationale.
I’ve been involved with a few. I’ve crunched the numbers every which way and found that there was no way we could do the work at a profit. I’ve gone to my boss and said as much.
“Ah yes, but think of the exposure we’d get if we won this, Rick,” comes the reply. And I’m sent away to come up with costs that would win the project but would get me disciplined if I put in such a loss-making bid on any normal piece of work.
Exposure is, of course, corporate code for senior executives hobnobbing with important people and getting their pictures in the papers. The rationale, or rather the post-hoc rationalisation, goes like this: If the project means we get to spend time in one-to-one meetings with powerful movers and shakers, it’s bound to lead to lots more work, so it’s worth going in at a loss. In my experience, though, while such projects gave plenty of the former, they rarely led to the latter. Senior people did the hobnobbing but the promised payoff never came.
So it is with many corporate projects. The ego comes first and the often flimsy rationale is built around it. Perhaps the most obvious examples of vanity projects are mergers and acquisitions. As a former colleague of mine once observed, these are just as often about big swinging dicks as any commercial considerations. The executives leading the charge love the glory and the limelight but, for the most part, the benefits for anyone else, including the shareholders, fail to materialise.
In many cases, even the term bounded rationality flatters the corporate decision making process. J G March’s Garbage Can model is closer to the truth. The ego leads and the commercial justification gets written up afterwards.
Is this any worse in public or private sector organisations, wonders Chris Dillow?
In my experience, having worked in both sectors, public and private sector managers are equally prone to vanity. Because of the greater complexity and ambiguity in the public sector, there is more scope for clever people to construct arguments to justify what they want to do. Set against that, the decision making processes in the public sector take longer and involve more people, so you don’t see the wilder and more spontaneous ego trips that have led to big private sector failures. Both sectors make vanity-based decisions but the consequences manifest themselves in different ways.
Of course, the argument many will make is that private sector organisations go bust if they make too may uncommercial decisions, so there is a Darwinian process weeding out the vain managers that is absent in the public sector. But, where large firms are systemically important, like the banks, this clearly isn’t true. Whether or not RBS would have needed a bailout if it hadn’t taken over ABN Amro is something we will never know but the acquisition was certainly a major contributor to the bank’s collapse. The vanity projects of those in charge of RBS in the run up to the financial crash, then, led to a direct hit on the taxpayer.
[T]he question of whether private sector firms are well or badly managed cannot be left to the market, and nor can they be rectified by macroeconomic policies. The question of how private sector firms are managed is a legitimate political one.
Indeed so. If a company’s vanity projects can have such have such an impact, regulators need to start taking an interest a lot earlier.