Tuesday, 23 September 2014

An example to us all: Tesco and the Holy Grail of private sector management skills

I’ve been accused by some of not being sufficiently enthusiastic about the great, internationally recognised truth, that they do things better in the private sector. Worse still I persist in remaining lukewarm despite having worked in private companies for thirty years.

I utterly reject that charge. 

There’s no “despite” about it. It’s all “because”.

In any case, how can anyone be anything but sceptical with the edifying example of Tesco before our eyes?

In its early days, Tesco was a decidedly downmarket grocer. “Pile it high and sell it cheap,” was the slogan of its founder, Jack Cohen. In the 80s and 90s, it moved upmarket, committing itself to quality and with prices that remained competitive but weren’t specifically aimed at being cheap. In 1995, it overtook long-time leader Sainsbury’s to become the number 1 grocery retailer in Britain.

But then the pioneering generation that had founded Tesco’s, and the equally entrepreneurial successors who took it upmarket and to the number one slot, began to give way to top executives who were only that: senior corporate executives. Hungry new low cost retailers entered the market and Tesco’s couldn’t react; it began to lose market share and profits.

On 29 August this year, the company had to issue a profit warning, cutting its forecast for the year from £2.8 billion to £2.4 billion. Now some of us might regard £2.4 billion as a not unreasonable sum – nearly a hundred thousand times more than the median income of a British employee – but last year, the company brought in just short of £3.3 billion.

Yesterday things turned even more embarrassing. Tesco had to make a further profit warning. It seemed that the previous forecast had, inexplicably, been overstated. Not by much – £250 million, and what’s quarter of a billion between friends? – but that was still enough to set a few nerves jangling amongst those friends (the City of London has the reputation for friendliness and loyalty one would expect from any major international financial centre).

Tesco: every little helps.
They seem to have lost sight of a little. It helped their forecast
Now, you don’t want to be too hard on those guys. After all, you can’t always find the staff these days. I mean, the Finance Director was such a washout that when they got rid of him, all they had to pay him was £970,000 to go away. What’s more his salary was £886,000, not even eighteen times median earnings. 

You know what they say: pay peanuts and you get monkeys. And, as we all know, monkeys can’t count. No wonder £250 million got lost in the accounts. 

It was no doubt a matter of chance that it was lost in a way that seemed to boost the company’s standing instead of undermining it.

Now the people who built Tesco’s had flair. Like them or loathe them, one can’t deny their business sense. In my career, I’ve met many executives who understand what leadership means and can inspire a company to do far better than might have seemed possible.

But I’ve met a great many nonentities of just the same calibre as Tesco’s seems to have recruited in recent years. What amuses me is that they still command eye-watering salaries. And they manage to persuade so many that the private sector management skills they exemplify are just what our railways lines, utilities or hospitals need to open up prospects of a brilliant future.

Don’t get me wrong. I’ve met a great many incompetent hospital managers in a long career working with the NHS. But, as Tesco’s so aptly demonstrates, I remain deeply sceptical that the mere fact of being a private sector manager qualifies you to take over and make things better.

Perhaps the private sector could start by setting its own house in order first.

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