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How should we evaluate the BBC's investment decisions?

Robert Picard, Director of Research writes:

The report on BBC's £78.5m loss on the acquisition and divestment of Lonely Planet released last week criticised management decisions and oversight of the deal and adds to earlier criticisms of the broadcaster's business practices following its shutdown of the Digital Media Initiative after an investment of £98m.

The Lonely Planet acquisition was built on a strategy of synergising the print content with online services and broadcast programming. The Digital Media Initiative was designed to modernise the company's content management system and was contracted to two of the world's best known technology and consulting firms.

The losses from these failures are sizeable, but each represents only about 1% of the company's annual budget during the years in which they took place. Neither endangered the future of the BBC and both were guided by defensible strategic objectives, but they failed for a variety of reasons.

It is certainly appropriate for any company to learn lessons from its failures. The BBC management clearly has significant lessons to learn about investment decisions and project management. But the incidents raise serious questions about how the public should evaluate and respond to such negative developments.

The BBC failures sparked significant press criticism, parliamentary examination, and reviews by the National Audit Office and the BBC Trust. While examination is appropriate given licence fee funding, the level of scrutiny goes far beyond that faced by commercial firms when their investments turn sour and it poses a real threat to innovation in the BBC.

When investments go wrong in commercial firms they are reviewed by boards, investors, and analysts. It is done with an understanding that failure in products, acquisitions, and projects are a normal part of the business and the failures are not castigated in and of themselves. This makes sense because failures are normal in commercial firms. 90% of all new products fail and about half of all mergers and acquisitions fail to produce the expected results because the companies overestimate their benefits.

Failures in public enterprises, however, are typically viewed as abnormal, even when they involve market activities. Every choice involved is questioned and every decision second guessed.

This is problematic because public service firms are regularly criticised for being lethargic, incapable of responding to market developments and slow to innovate. In the BBC cases, however, the organisation was trying to respond to the market and innovate. Had it not tried it would have be criticised equally. Therein lays the danger.

BBC management needs to learn how to better develop and oversee commercial strategy and how to implement and direct major projects involving outside contractors. What is should not learn, however, is that being innovative or trying to improve revenues with commercial activities is dangerous and can lead to punishment.

The public also needs to learn that such initiatives need to be judged much as commercial investments in similar projects would be assessed. The criterion for judgement should not be failure or success, but whether the levels of risk are appropriate, how uncertain investments fit into overall investments and expenditures, and how they should be overseen within the organisation.

Public enterprises are in difficult positions today. Firms such as BBC are increasingly relying on less on public funding and being asked to produce more income from commercial activities and service fees. In doing so, we need to find better ways to think about their activities, the risks they take, and how the public as owners needs should evaluate the success and failure of new initiatives.

This was originally published at theguardian.com/media-network/media-network-blog