Corporate amnesia

European Business Review

ISSN: 0955-534X

Article publication date: 1 December 1998



Kransdorf, A. (1998), "Corporate amnesia", European Business Review, Vol. 98 No. 6.



Emerald Group Publishing Limited

Copyright © 1998, MCB UP Limited

Corporate amnesia

Corporate amnesia

Arnold Kransdorf

It was not so long ago that individuals would have had one, perhaps two, jobs in their working lifetime. Today, new entrants to the workforce can expect to have 11 different employers, thanks to what is called the "flexible labour market". While designed to help employers cope more effectively with change and competitive pressures, this new work model ­ evident in varying degrees of implementation over the Western world ­ is almost invisibly imposing a deceptively high built-in degree of inefficiency into industry.

It has reduced the average enterprise tenure for employees to around five years ­ and falling. Alongside that other agent of discontinuity ­ internal job rotation ­ it means the continual dispersal of companies' hard-won and expensively-acquired organisational memory (OM), the company-specific knowledge accrued from experience. At the rate it is being forgotten and/or is walking out of the front door, many institutions are forfeiting their individual know-how faster than their ability to retain it.

The disappearing OM that has to be re-learned repeatedly includes all the routines and processes (formal or otherwise) that make an organisation tick. Typical examples are the individual's understanding and accommodation of their employer's individual corporate culture, management, communications and decision-making style, contacts and relationships between employees or teams of employees, the detail of job-related events and the knowledge of tried and tested usage as it applies to the organisation's own market circumstances and special environment.

The nature of OM is predominantly non-explicit, otherwise categorised as tacit knowledge or the "how" of know-how. It is an intellectual asset that is unique to every company and which is also the most important constituent of any institution's durability. Without it ­ this is the state known as "corporate amnesia" ­ companies have little experiential advantage because they cannot benefit from their own hindsight. This cedes a greater disposition towards repeating mistakes, re-inventing the wheel and not learning properly from successes, the evidence for which is widespread across industry. By any measure these are unwelcome charges on productivity and competitiveness ­ especially if the nature of the new work model means they keep on recurring.

Up to now, the organisations that subscribe to the policy of the flexible labour market have largely ignored the consequences on themselves. But with the majority of employees, including managers, now personally unaware of what and how things were done in their own companies prior to 1992, proper management of this hitherto disregarded competency has assumed a new and vital importance to institutional endurance.

Professionally applied in its oral, written and visual forms, OM's employment can profitably address many of the tenure- and experience-related problems that workplace discontinuity has imposed on Western industry in recent years. Among them the problems include how to stop the brain drain from departing employees, how to shorten the induction period of new appointees and how to help managers learn more effectively from their own experiences. In its wider application as corporate and business history, it is also a powerful teaching tool in the educational system.

Yet few companies have a formal policy of passing on their experiences from one generation to the next. In addition, both corporate and business history are notable for their widespread absence in the education systems of many countries, including at business schools, where management is still largely taught using empirical methodologies dominated by macro-economics and quantitative analysis. Subjects like social history and political history are an integral part of the general educational curriculum (even musicians study music history, artists art history and architects architectural history) but the people who have to go out and learn their livings ­ i.e. almost everyone ­ are being prepared for the role without the historical perspectives of their predecessors or an awareness of their corporate past. The oversight is the equivalent of military academy Sandhurst not referring to the First World War, Second World War, the Korean War, Vietnam, the Falklands or the Gulf in their classrooms.

The thesis is disarmingly simple: if companies do not pass on their OM, successive generations ­ whether school leavers or graduates entering the workforce for the first time, or employees moving from one company to another ­ have nothing to inherit. Consequently, new entrants have to start substantially from scratch, while employees moving laterally across the workforce end up applying the lessons (where they are remembered) of other employers, whose way of doing things, corporate environment and market circumstances are always very different. For the whole of industry this makes the continuous learning curve necessarily steeper and longer than it might otherwise be. Simply put, without effective measures to capture and apply OM effectively, companies do not ­ or cannot ­ benefit from their tried and tested experiences. This, in turn, affects the competency of organisations to improve their productivity and helps to explain why the process of change is always so disruptive, slow and halting.

There are several other consequences of not passing down business experiences from one generation to the next that manifest themselves in a wider, idiosyncratic form. Is the lack of the necessary role models to act as motivators a possible explanation for why the vast majority of school leavers in the UK have always been more interested in public service jobs than industry? Or why British businessmen continually complain of widespread employee ignorance about business and the role of companies? Or, even, why, in spite of Mrs Thatcher's efforts to improve the country's business culture, the UK remains near the bottom of the league table of industrialised nations in new enterprise creation?

With a large proportion of the workforce of most companies now permanently in the induction phase of their employment, real life examples of the consequences of corporate amnesia abound. There are companies in the UK aerospace industry, for example, that are experiencing serious problems in redesign and improvements of aero-engines. Because the workforce no longer has the continuity it once had, there is no one around to explain why particular engines were designed in a particular way. At the beginning of the 1989/1990 housing market collapse, the Halifax Building Society did not have in place any branch managers who could remember first hand how the organisation handled the previous housing market downturn. The organisation finds itself in a similar position now that the housing market is recovering; there are once again few around who can remember accurately how the organisation responded to the last upturn. Elsewhere, one US insurance group, which had slimmed its claims department, found it was settling big claims too swiftly and too generously. Belatedly, it discovered it had sacked several long-term employees who had created an informal ­ but highly effective ­ way to screen claims.

Corporate amnesia's latent magnitude and its pervasive nature can also be seen in the fast-moving high-tech sector and elsewhere in the banking industry, examples that moreover highlight its potential impact at the strategic level. In the 1980s a smug Remington yielded dominance of the typewriter market to IBM. Almost immediately IBM made the same expensive mistake by reacting inappropriately to a technology that threatened its own core business. On the surface it simply misjudged one of its product's life cycles but, in reality, it mishandled the emergence of personal computers by vastly underrating the impact that they would have on its larger mini and mainframe businesses. A memory of how Remington reacted to similar conditions might have encouraged IBM to give its originally independent PC unit a longer life ­ and avoided the USA's biggest annual corporate loss of $4.9 billion in 1992. The fact that IBM is among a string of companies that have not attempted to record their OM, because their executives will not allow access to their records, makes the episode seem not unsurprising.

In the early 1980s the banking community was badly mauled by bad debts in South America. Less than ten years later it was again overwhelmed, this time from loan defaults elsewhere in the Third World. Speaking in 1991 Lord Alexander, chairman of the National Westminster Bank, admitted there were plenty of historical precedents on Latin American lending which "should have put the red light up for everyone". He added: "We have got to ensure that the lessons of the recent past are not forgotten by the rising generation of bankers". As he was talking the banks were once again making similar errors of judgement ­ this time at home ­ with High Street lenders having to chalk up further provisions, collectively totalling almost £4 billion, in their 1992 accounts. This prompted one city analyst to comment that, "the biggest worry is that banks do not seem to be capable of learning from their mistakes".

Detail aside, the key measure of how well organisations learn from their experiences is how effectively they can improve their overall productivity. The collective experience in the UK, where little OM is "inherited" in either the educational system or the workplace, is instructive. As the world's oldest industrial economy, Britain should ­ in theory at least ­ manifest some experiential advantage.

In 1993 ­ at the tail end of the country's deepest recession for more than half a century ­ the Financial Times quoted the results of a Cranfield Business School study. It showed that just 2 per cent of British companies were world class. The survey, which also found that British managers thought they were the best in Europe, caught the attention of Deputy Prime Minister Michael Heseltine, also Britain's Trade and Industry Secretary. He rebuked the nation's managers for overconfidence, and asked his audience, at the annual dinner of the Institute of Directors, for a clear recognition that there was a gap between the UK's industrial performance and the best in the world. In spite of increases in productivity, he said, the UK was still 25 per cent behind its main European competitors and even further behind the USA.

Four years later ­ in a boom period that was generating profits and employment that were the envy of many of its European competitors ­ a Royal Society of Arts (RSA) study rediscovered the unflattering position in Britain's comparative performance with its main competitors. "We seem as a nation unable to close the gap between our industrial performance and that of other major manufacturing nations", it concluded. Just months later, after the Conservative Government's disastrous defeat at the polls, Margaret Becket, Mr Heseltine's successor, was echoing the same message. A Government benchmarking exercise had found, she said, that the task faced by UK business in catching up with the best in the world was "bigger than we thought". The performance of companies throughout the supply chain, even at the top, "isn't as good as the performance of companies overseas". This, and the fact that UK productivity has lagged behind almost all of its First World competitors for most of the post-Second World War period, confirms that not much learning from experience is taking place. Or that others are better at experiential learning than in Britain. In fact, according to The International Institute for Management Development (IMD), Britain slipped in the world economic rankings from fifteenth in 1995 to nineteenth in 1996.

To try and find an explanation, the Financial Times published an article under the headline "Why Michael Heseltine is absolutely right". Referring to Britain's managers as "myopic", it quoted Mark Smalley, who headed PA Consulting's strategy unit and directs its Midlands office, as saying the reason was British managers' self-delusion, arrogance, insularity and an unwillingness to learn, in particular a reluctance ­ or inability ­ to learn from the discomforting experience of others. My contention is that PA Consulting's observation extends to companies' widespread inability to learn from their own experiences.

For further support of this conviction, a 1994 study by the National Westminster Bank found that more veteran companies failed in the last recession than in any other previous economic slump this century. A massive 10 per cent of firms that had survived two world wars, the bleak 1930s depression and the succession of cyclical downturns, crashed between 1989 and 1993, which also happened to coincide with the height of the downsizing boom. Why were they able to survive previous recessions? Because, I contend, there was less discontinuity ­ and an organisational memory that provided them with the benefit of how they manoeuvred their way out of previous crises.

It is a funny thing, experience! The encyclopaedia of life, its conveyance, on which all experiential learning is dependent, is contingent entirely on two mediums ­ memory and the instruments of the written word and/or the printed picture. Depending only on the former is not very reliable. Its recall, at least in any accurate form, has the tendency to deteriorate into legend and myth. When that happens, whatever transpired has a way of disappearing from view. Witness some of the great Middle Eastern, African or South American civilisations. Of those that did not have a tradition of recording their experiences, how many survived?

Except for those who choose to forget, or remember selectively, it is no coincidence that those civilisations that endured developed a recording tradition that ­ however unconsciously ­ provided a reference point from which individuals, at one level, and nations, at another, acquire the ability to learn experientially and incrementally. As all the great established religions have shown, the practice is moreover an extremely powerful way of embedding and reinforcing a tradition and a culture. It is, at root, the most efficient medium of inheritance and one that many agencies already use to their considerable advantage.

If one extrapolates this theme into the business world, it is of no little concern, then, that the education systems of so many countries provide so little historical awareness of their companies, in particular, or business in general; likewise, that so few organisations depend only on the informal oral tradition, which has to run the gauntlet of short and selective memory recall and, now, the flexible labour market.

Most modern managers, at least in Anglo-Saxon countries, typically equate the past with tradition and the belief that its reminder discourages the ability to change. Alongside a constrained appreciation of the nature ­ and importance ­ of tacit knowledge, this is often reinforced by the perception that past models are irrelevant because circumstances change.

Rather than being immutable, the tried and tested past is, in fact, intrinsically organic if treated as a learning tool. As an inventory of experiences, it is an invaluable resource with which more informed and better decisions can be made to help individuals perform more effectively than their predecessors. In the words of Harvard scholar Alan Kantrow:

Like it or not, the past infects the world we live in, the decisions we make, the very choices we see to lie before us. If we ignore its influence, we do not escape its power. All we do is remain to some extent its prisoners without ever really knowing that that is what we are. If, however, we acknowledge it, learn to recognise its workings, come to greet it on familiar terms, we can put it to excellent use.

In truth, there is much less danger in being aware of the past than remaining in ignorance of it.

Whether in the UK or elsewhere, experiential learning depends on an unambiguous awareness of one's own experiences, which is the prime constituent of that emigrating resource, organisational memory (OM). Institutions have already paid for their OM once. If it is not to pass beyond reach, it needs to be managed professionally ­ just like any other corporate asset.

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