There's something in firms that makes people stupid

On Thursday, David Blunkett, the Secretary of State for Education and Employment, became the latest government minister to acknowledge the growing importance of human capital as opposed to those old standbys, plant and machinery.

Tony Blair has long realised that Britain's future prosperity is dependent on our ability to harness the various talents that together make up this new form of capital. And now we have another member of the Cabinet speaking the language associated with Peter Mandelson, the former secretary of state for trade and industry.

"Knowledge is now wealth and power. Microsoft is so valuable, not because of its fixed assets, but because of the human capital of its software engineers and programmers," Mr Blunkett said in his lecture at the Centre for Policy Studies in Education at Leeds University.

But dramatic as this pronouncement may be for a Labour politician, it is really old hat in the world of business. In fact, the issue there is not so much the intelligence and skills of individual workers, but the intelligence of organisations themselves. According to James and David Matheson, authors of The Smart Organization, companies have put so much effort into achieving operational excellence that they have neglected to think.

They stress that they do not regard this "corporate body-building", as they call it, as bad. Indeed, it is so important that no business can expect to compete without it. It is just not enough on its own. Even Tom Peters, who wrote the bible in this area, In Search of Excellence, with his former McKinsey colleague Robert Waterman, would agree with that now.

The difficulty is that most companies seem to have become so obsessed with improving quality, cutting costs and making themselves efficient that they have lost the ability to form strategies, or to make effective use of their assets.

It is tempting to think that only dull old companies can lose out in this way. But the Mathesons, who work for the US consultancy Strategic Decisions Group, have plenty of examples of how hi-tech companies rich in brainy people can get it wrong. As they point out: "There is something in companies that dumbs them."

Some of this is down to the dynamics of companies or indeed any sort of organisation. People are generally unable to be frank and say what they mean to each other. Instead, they go through rituals.

One of the most serious of these is the "corporate liars game", which particularly comes to the fore during budgeting sessions. Essentially, it involves each manager concerned putting in for more resources than he or she needs on the basis that they will inevitably be bid down. In the end, say the Mathesons, the biggest liar wins.

This might seem harmless enough. But, they add, it destroys the ability to communicate. What happens is that the boss checks up on how the resources are used because he or she has gone through this process too. Their point is that, not only does this create an organisation that is lacking in social harmony, it makes poor business sense. Organisations do not make the quality decisions they could if their executives were having proper conversations about such issues as needs and aspirations.

Such a dialogue might also help organisations become flexible enough to respond, or even anticipate, changes in their markets. The much-cited example of this is Microsoft and how it suddenly abandoned its opposition to the internet and set out to embrace it so successfully that it ended up on the wrong end of a Justice Department anti-trust suit.

But the Mathesons have found so many other companies that are able to behave in this way that they are now convinced that corporate intelligence is a leading indicator - as opposed to the lagging indicator that is operational excellence - of corporate performance.

In other words, corporate turnaround artists may like to concentrate on wrestling with costs and the like, but what they need to do to give themselves and their organisations a better chance of success is get smart.

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