People are powerful, so let's party

ECONOMICS
Enjoyed the office party this year? Or a party for customers/clients/suppliers? And thought about just why the company held it?

Nearly every well-managed company nowadays puts an enormous amount of effort into its human relations; not just its own internal relations - those with its own staff; not just those with other people with whom it does business; but also relations with people in the local communities in which it operates, and with government, media and the like.

We see this most obviously in the boom in the amount of entertaining that companies carry out, but also in a number of other ways that actually are more important. Of these, the most crucial is the sharing of knowledge between the insiders of a company and those on the outside.

More of that in a moment. First, the "why?" question - what provokes this great activity, what has changed?

The best starting place is to think of the change in the nature of capital in a company. It used to be mainly the physical and financial capital, the factories and the cash resources. There were always other, less easily defined forms of capital: patents, brand names and the like. But these were relatively less important. Now, while physical and financial resources are still important for manufacturing enterprises and financial resources matter for all, the principal capital of most businesses lies in people's heads. It is intellectual capital. In some extreme case, a management consultancy for example, virtually the entire capital of the business comes in this form. So nurturing intellectual capital, building it, and then extracting value from it, is the crucial variable determining success of the business. The office party may not appear a great exercise in generating intellect - in some cases rather the reverse. But it is an effort to strengthen the glue that holds people together.

By the same token, corporate entertaining is designed to strengthen the glue that holds a company to its suppliers and customers. This, too, has become more important as the complexity of these relationships has increased. Go back a generation and most companies had mainly vertical relationships. They bought in supplies, did something to those supplies, and then sold the product.

Now, these vertical relationships have been complicated in two ways. First, they involve much more sharing of knowledge than they used to. This is largely a result of outsourcing. Thus a computer manufacturer may actually not "make" anything itself but commission manufacturing to its own designs. This involves enormous amounts of trust. The lead company has to share details of design and manufacturing technology with another company over which it has no legal or financial hold. The company doing the making has to share the knowledge it acquires from the manufacturing process with the designer if the manufacturing is to be carried out in the most efficient way. It is impossible to tie these relationships down in legal terms because of the intangible nature of many of the ideas being exchanged. In fact, neither side will know fully the value of the knowledge that is being passed across until long after the event. So a relationship of trust between human beings is vital.

Second, quite aside from these (increasingly complex) vertical relationships are new horizontal ones. Companies that are competitors in one field are increasingly co-operators in another. The big oil companies are the longest- established example of this, typically co-operating on exploration but competing on distribution,

but the trend is spreading fast. For example, the primary method by which North American and European companies are entering the former Soviet Union and China is by undertaking joint ventures with local firms. Managing these relationships is much harder than the co-operation between oil companies, which already have a common culture. The more global that commerce becomes, the more important are these horizontal relationships between (often culturally very different) individuals.

If this seems unconvincing then ask why Japanese executives learn to play golf, or Western managers force themselves to sing in karaoke bars? Answer: it supposedly builds up trust.

Internal relations have also become both more important and more complex. They are more important because of this need to build intellectual capital and to extract value; and they are increasingly complex because often the people involved are not full-time staff but part timers or consultants.

We know quite a lot about building intellectual capital. Large firms spend vast amounts of money on management training. The money may not always be spent effectively but at least the aim is identified. But such a spend gives rise to two objections. One is that the employee might leave and take the investment away. Obviously this does happen in individual cases, but wise firms will tend to argue that in reality the truth is the reverse: only if companies train will they be able to retain their best staff, for staff who feel they are not adding to their capabilities will go somewhere else to get trained.

But of course not everyone is in a position to undertake training with their employer. They may be self-employed or unemployed. They may want to move in a different career direction. So what happens to them?

The answer at the moment is that some people do pay for their own retraining. But not very many can afford it. One way of boosting the proportion has been floated by the Swedish insurance group Skandia, which is seeking to develop what it calls "competence insurance". The idea is that individuals, the state and the employer, if there is one, should all help to fund retraining. All three would contribute to a fund, "owned" by the individual, which would be used to pay for retraining. Everyone would benefit - even the state, for the retrained person would have higher earnings and so pay more tax.

Now, the idea developed in Sweden focuses on this three-way partnership, and here the scheme might work better if it were redesigned to focus more on the individual and less on the employer and the state. But to come back to the original point: training and retraining have the effect of helping companies glue themselves together. It is, so to speak, the serious side of the same motivation which provides the office party.

As companies move more and more towards the pattern described by the author Charles Handy, providing both core workers and portfolio workers with training, and something of a social life, has a clear economic logic. But I think good companies will increasingly try to do something more: to provide a lifestyle, too.

Of course many multi-nationals do still provide a lifestyle. Expatriate executives of oil companies often live in company compounds and have medical and educational services for their families on the firm. But this is not a lifestyle that many people now want: too regimented, perhaps too male.

The increasing search for competitive advantage, in a world where such advantage comes from attracting and retaining clever people, will drive firms to become "lifestyle companies". Such companies will put a lot of effort into tailoring a way of work that suits these clever individuals. This may mean part-time work contracts while the people also work for themselves; it may mean giving people freedom as much as money; it may mean backing their entrepreneurial activities, acting as a banker to their staff, rather than a pure employer. It may (another Handy idea) mean making offices feel more like clubs.

And it will mean holding more office parties - not just at Christmas, but where needed through the year.

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