John Seddon’s Podcast, February 2022

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Regulation as a disease; but, at last, there is real hope…

I have been a critic of the way we regulate organisations throughout my career. In short, our means of regulation frequently make performance worse. Deming had the following to say about regulation:

A regulation is justifiable if it offers more advantage than the economic waste that it entails.

The economic waste is not limited to the bureaucracies of compliance and inspection, it extends to economic damage to enterprises.

But I am motivated to do this podcast because I have been reading the Financial Conduct Authority’s consultation papers on what’s called Consumer Duty and it is a radical shift in thinking about regulation. I’m excited about it. It has amazed me; it will provide lessons for all regulators. It will also minimize both types of economic waste.

I’ll come to what’s brilliant about Consumer Duty, but I’d like to start with explaining what’s so wrong with our approach to regulation; why I’ve been a vociferous critic; how regulation makes performance worse.

Many years ago someone said ‘John Seddon must have been bitten by ISO 9000 as a child’. Yes, I expressed extreme and angry antipathy to ISO 9000. It all began with its predecessor BS 5750. I met British Standard 5750 in the early 80s. I had finished an assignment with Honeywell Bull’s engineering division. In one year they had improved service, revenue and customer satisfaction; the results were so strong they won an industry prize. All we did, by the way, was help them design a system focused on customers instead of the hierarchy. Anyway, someone in Honeywell Bull gave me a copy of the BS 5750 standard, telling me that it was argued to be the means to do what’s just been achieved in the engineering division. Better quality.

I read the Standard and it made little sense to me, so I did what most people would do in that situation, I put it in a drawer. About a year later two things happened. The press was full of stories of discontent with BS 5750 and a septuagenarian of the Quality Industry told me to read 5750 again and imagine I was running a factory making bombs in World War 2. It made some sense. We had a problem; bombs could go off in factories. By specifying each step of the work and ensuring independent inspection of each step the problem was solved. So, to me this represented a method for the control of output, but not a good method – I had been taught by Deming that you can’t inspect quality into a product. So, in short, lousy theory. From memory the Standard didn’t drop the requirement for independent inspection of all processes until 1987.

I decided to survey peoples’ opinions of BS 5750. The British Standards Institute published a list of companies registered to 5750, making it easy to find participants. The results were not good; they echoed what we were reading in the press. Poor value for money, excessive power to picky inspectors, a climate of fear and doubts about whether it resulted in better quality.

I took the survey results to the British Standards Institute. I met a man called Ram Mylvaganam. He told me I didn’t know how to do research (I have two research degrees) and he sent me on my way. That got my gander up. I took what I knew to the press and argued about it on Compuserve. For a time, I was the go-to person for journalists writing about 5750 and a publisher noticed my arguments on Compuserve which led to a book – The Case Against ISO 9000 where I used case studies to show what people had been doing to comply with the Standard and compared it to what they could have done if they had wanted to improve quality.

BS 5750 morphed into ISO 9000. Margaret Thatcher had been persuaded that BS 5750 contained the Japanese manufacturing miracle – utter bullshit – but what could Thatcher know? – and blessed its transfer to the International Standards Organisation. Like BS 5750, ISO 9000 grew through coercion – ‘you comply or we won’t buy’. As dissatisfaction spread alongside ISO 9000’s spread, our government’s response was not to stop it, but to take one sector and try to do a better job of it. The sector chosen was software development. The scheme, Tickit, didn’t tick it. But it was too late, the train had left the station and the UK had, at least, if there was a benefit, forced world-wide competition to be sub-optimised.

In the days leading up to the change of label from 5750 to ISO 9000 I spoke at a conference in Wales, chaired by a Welsh television personality, who used the phrase ‘good old 5750’. That got me going, I gave it both barrels, he described me as someone who’d been invited to a wedding and peed in the punchbowl. It hardened my resolve. I began describing so-called quality standards as giving power to the ignorant. People in positions of power can oblige organisations to do things that make them worse. Failing to comply can mean losing business. A madness, imposing bad theory by coercion.

And it didn’t stop with so-called quality standards. If your job is to help organisations improve, as mine was, you are bound to come across things that have been mandated by regulators that are ill-conceived and create sub-optimisation. If we jump forward twenty years, I found myself being invited to EU conferences on better regulation. The EU had set up a better regulation task force. Unwisely they had given that job to regulators. I would tell regulators the things I had witnessed. For example; in utilities: With opening the market to new energy providers, the regulator took the view that it made sense for all providers to use one meter-reading firm rather than have their own meter readers. Sounds like a sensible idea. Until you open the bonnet and you learn that the highest-frequency failure demands are associated with meter reading and when you study what’s happening in the meter-reading firm you see meter readers get points for reads and, stupidly, can still get points for having good reasons for failing to get reads. Points mean prizes. The only way we could achieve substantial improvement in service and reduce operating costs was to control our own meter readers by designing their work with a better purpose, and to do that we had to seek permission from the regulator.

Reflect on that: you cannot improve without approval of the regulator. Astonishingly wrong, isn’t it? The same happened with children’s care and food safety. In both cases our clients took the results of studying the system to the regulator to show how regulation was part of the problem. In both cases local leaders had to get permission to step outside of regulations to improve. I was stunned. The regulators had been shown, with unequivocal evidence, that regulatory requirements were a primary cause of sub-optimisation. I naively imagined the evidence would cause them to re-think regulation, but none did.

I would tell EU regulators the story of being on platform 4 of Milton Keynes Central at three in the afternoon clutching a £75 first class return ticket to Euston. The train pulled in; it is only going to Euston; Euston next stop; plenty of seats in first class. Then I hear a station announcement: Do not board this train. The train has stopped for alighting passengers only. If you board this train, you will be charged for a journey from Rugby. I asked why this madness was happening. Yes, it was a ruling from the regulator, attempting to aid competition between train operators. So, what of customers?

I was among those who argued for the Audit Commission to be closed down. I provided loads of examples of how their inspectors had coerced local authorities to do wrong-headed costly things in the name of ‘best practice’. At least we won that argument.

I could go on. I have so many examples. But let’s get to the point. It’s our method of regulation that’s the problem. In my work with service organisations I have learned that there is a systemic relationship between purpose, measures and method; that is to say it exists in all organisations for good or ill. When regulators specify matters of measurement or method, they create a compliance culture (satisfy the regulator’s specifications) which frequently works against the purpose (satisfy customers) and constrains method – how the work works. Once you know how to look you can see it everywhere. Organisations can receive good ratings from regulators yet be poor at serving customers and wasteful in terms of resources. And we’ve had plenty of those in the news.

So let’s get to what has got me so excited about the Financial Conduct Authority’s Consumer Duty. It is the first example of avoiding the problem. The FCA has announced the purpose of regulation and refuses to dictate method and measures. Consumer Duty is represented by principles associated with the following requirement, and I’ll read it:

Consumer Duty will require all firms to consistently consider the needs of their customers, and how they behave, at every stage of the product or service lifecycle, and continuously learn from their growing focus and awareness of real customer outcomes.

By limiting regulation to principles, the onus is put on leaders of organisations to make choices of measures and methods, making regulation a more transparent process (the choices will have to be declared), removing the scope to hide behind evidence of compliance, and, more importantly, will liberate method, increasing innovation. Brilliant!

It is important to note that the FCA provides good grounds for this revelation in regulation. Their documents are full of examples of failures to serve customers well. Lack of price transparency, hidden costs and charges, selling high-risk products to those who cannot afford risk, making it difficult for customers to cease contracts and so on. The industry has a poor reputation, it gets bad press. So it has to be the case that people in the FCA realise that the way we regulate needs improving.

It reminds me of a conversation I had with Vince Cable when he was a minister for business, at the time of the financial crash. He asked how we might have prevented the crash. I replied to say that the problem with regulation is it’s always behind, it’s too late, it should be at the front. It should be the responsibility of the regulated to ensure any service is fit for purpose, it should be their duty to monitor the same and alert authorities in the industry when it fails. It is as close to prevention as you can get. These are some of the operational principles and ambitions of Consumer Duty.

But guess what, not everybody in financial services is keen. They don’t want principles they want rules, interpretations, examples, guidance. No surprise, these people have spent their careers complying with rules and ensuring they can put on a good show for inspectors.  Principles leave them with uncertainty about what to do and the FCA is wise to refuse to specify anything. For good reason. There is so much variety in consumer demand, it is impossible to predict what could go wrong, to specify anything would leave space for the unpredictable… that could be argued to be beyond the scope of regulations… better to work to principles… that covers everything.

Some people argue that Consumer Duty will create higher costs. It illustrates their mind-set. The management ethos in financial services is dominated by cost management. Financial services organisations are designed on a factory logic with its attendant features – all well-known to you if you’ve followed my podcasts and publications. That’s what has to change.

None of the concerns – and there are many more – is a real cause for concern. Again, as you will know if you follow my work, financial services organisations are stuffed with failure demand. It is a clear signal of the current failure of Consumer Duty but, vitally, it is also the first thing to get thorough knowledge about if you want to improve operating costs at the same time as knocking your customer’s socks off.

To put it at its simplest: If a service organisation is designed to understand each and every customer’s need and then works to serve that and only that the cost-of-service provision will be optimised. Working this way is to focus on value, not cost, but costs fall as a consequence. Leaders become competent in understanding the relationship between demand and capacity. As services improve, capacity increases and more work can be done with fewer resources. We have plenty of evidence of dramatic improvements in customer service resulting in equally dramatic improvements in revenue and operating costs. Fulfilling the purpose of Consumer Duty will have tremendous economic benefits.

If the FCA sticks to its guns the new Consumer Duty will be a ground-breaking approach that should attract the interest of all regulators. Hats off to the FCA! Wake up leaders of financial services organisations, it’s time to take responsibility.

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