Certain Habits

Albert Einstein defined insanity as “doing the same thing over and over again and expecting a different result.”

The European Union is currently writing its strategic plan for the next decade. That should be an encouraging sign. Finally, you would think, Europe would begin dealing with their entitlements and debt issues, especially with the Greek crisis a harbinger of things to come.

And you would be wrong. For Europe, strategic planning is more akin to fanciful wishing.

Exhibit A: Europe’s last ten year plan, the Lisbon Strategy. The resulting plan aimed at making Europe “the most dynamic and competitive knowledge-based economy in the world capable of sustainable economic growth with more and better jobs and greater social cohesion, and respect for the environment by 2010.”

Show of hands. Who thinks that plan has been a success?

Not the Swedish Prime Minister, who last year commented “Even if progress has been made it must be said that the Lisbon Agenda, with only a year remaining before it is to be evaluated, has been a failure.”

So, has Europe learned anything from the failure of the Lisbon Strategy? Or is their planning process insane, repeating the mistakes in planning and hoping for a different outcome?

Revised Expectations

Apparently Europe has learned that they have no hope of being the “most dynamic and competitive knowledge-based economy in the world.” In the recently published 2020 goals, Europe is aiming merely at a 2% increase in their rate of growth.

That’s still an ambitious goal. Through 2008, Europe had grown over 2% a year. While growth has collapsed under the weight of the financial crisis, even achieving 2% growth compounded over the next decade is a daunting challenge with debt crises imminent and an aging population and moribund employment.

Implementation

A strategic plan can’t just identify how the future should be different. It has to define what behaviors—today, tomorrow, in the future—need to change to achieve those future results. And, crucially, you have to be willing to actually change what needs to be changed.

Europe has identified some intermediate goals this time that they hope will enable them to achieve their plan this time around. Those goals, according to the New York Times, are:

…increasing employment to an average of 75 percent from 69 percent among people ages 20 to 64; raising the number of young people gaining a college degree to 40 percent from 30 percent; lifting research spending by governments and companies to 3 percent of gross domestic product; reducing the number of people living in poverty to 60 million from 80 million; and generating more renewable power while reducing energy consumption.

Of course intermediate objectives aren’t enough. Intermediate objectives that unrelated to the broader strategic objectives are interesting but irrelevant. And when relevant, those intermediate objectives need to be enforceable, measurable, and beyond manipulation. Europe 2020 fails not just these three requirements, but the relevancy test as well.

Enforcement

In addition to meaningful steps and clear objectives, a strategic plan needs a feedback mechanism (clear benchmarks and measurements) and enforcement (to ensure course correction should behavior deviate from plan).

Criticism thus far of Europe 2020 has centered on the lack of enforcement mechanisms. While the plan proposes “surveillance measures”, the new “enforcement provision” is reduced to “the power to send a formal warning to a member state, effectively naming and shaming the country, if it is diverging from the bloc’s overall economic strategy” (the NYT again).

The criticism is right as far as it goes. Public shaming of politicians, who by definition are beyond shame, isn’t exactly an effective way to enforce policy.

The bigger problem, however, is that the goals Europe proposes to measure are unlikely to advance the plan. The problem is two-fold. First, some goals are unrelated, or at best tangentially related, to achieving plan goals. Second, the intermediate goals are outcomes, not actions. Outcomes can be manipulated without taking action that advances the plan.

Measuring the Wrong Thing

One obvious example of an unrelated goal is generating more renewable power may advance the sustainability part of Europe’s agenda, but apart from large technological advances, it’s unlikely to contribute to a 2% year over year compounded increase in the Continent’s growth. Indeed, it’s likely to further increase energy costs, putting it’s export industries at a further competitive disadvantage and taking money from consumers that they otherwise could spend on domestic goods.

The focus on R&D spending and education, while it creates the appearance of a dynamic, knowledge-based economy, is at best tangentially related to plan. Shear Euros spent on R&D does nothing to ensure that the R&D fuels growth. And the the provision that the R&D be private or public increases the likelihood that incremental research euros will be unproductive.

Europe’s problem isn’t that it spends too little on R&D. Rather, it spends too much through institutions like Europe’s Information Society. It’s “key mechanism” is (don’t laugh) “is the National ICT Research Directors Forum which is an informal framework through which national ministries responsible for ICT research policy and funding (typically research and industry ministries) and their Commission counterparts meet twice a year to discuss and develop shared visions and strategies for ICT research in Europe.”

What Europe needs is to enable it’s people to earn a greater return on successful R&D. The reason people start companies working on subjects like alternative energy, software, biotechnology, electronics, materials science, and more—when ruin confronts failure and one in 1000 (or fewer) ideas might become commercially viable—is the chance of becoming rich. With their regulatory burdens, they’re raising the cost of research and with the tax systems they’re lowering the return investors will enjoy. The result is to price out of existence the riskiest of those investments. And because the risk of an investment is inversely proportionate to the difficulty of the problem (you have less chance of solving difficult problems) and the size of the resulting market (big markets attract competitors), Europe’s regulatory and tax structure discourages the R&D most likely to advance its plan.

What Europe should measure first is return on private industry R&D. If Europe could hold its R&D expenditures constant and increase its return on R&D, it would be far along the road to achieving its long term objectives. (And if R&D earns a higher return, you’ll see more of it).

Outcomes Subject to Manipulation

Most of the intermediate goals contemplated by Europe 2020 are susceptible to (counterproductive) manipulation. Consider increasing the number of students in higher education.

This is a classic example of defining an objective, not actions. In order to increase the university students from 20 to 30 percent, Europe would either need to increase the number of universities it has by 50% or to enable its existing universities to accommodate 50% more students. How exactly are they supposed to achieve that? What actions are required? What investments need to be made? And can they be made soon enough to achieve plan growth objectives?

This is also a goal subject to manipulation. The easiest way to achieve this goal (and politics, like most of life, always takes the path of least resistance) is to subsidize university attendance. However mere attendance does nothing to ensure either that students learn what universities have to teach, or that what universities have to teach is actually productive (and able to achieve planned growth). In the meantime, subsidies increase either the debt or tax drag on the economy, or both.

Other goals suffer from the same problem. How do you increase employment? As the Obama administration has demonstrated, you can “create jobs” by paying even more people to work for the government. How this will create growth, instead of a drag on growth, however, is anyone’s guess.

Surely it can’t be bad to try to reduce the number of people living in poverty by 25%, right? Well, the easiest way to do that is to redefine “poverty”. The second easiest is to increase transfer payments to above the poverty level. Neither option is productive in a broader sense. But when you’re measuring the wrong things, and easily manipulated things at that, you can’t expect productive outcomes.

Broader Lessons

While it’s easy to poke fun at a strategic planning exercise like Europe 2020, it’s an exaggerated example of the kinds of mistakes routinely made in companies both large and small.

We define objectives but when we identify intermediate goals or required actions, those goals or actions either measure the wrong things or they’re so abstract that they no more constitute a plan than did the initial objectives.

The danger inherent in every strategic planning process is the magic wand syndrome. It’s tempting to believe that the hard work of defining the objective is the hard work of the plan. In fact, the plan is nothing but an empty wish without concrete actions to achieve it, the will to follow through, and feedback mechanisms to ensure the plan stays the course.