Does Management Really Work?
Are organizations more likely to succeed if they adopt good management practices? For a decade we’ve been conducting research to find out. That may seem like a foolish endeavor – isn’t the obvious answer yes? But as classically trained economists, we believe in re-examining long-held assumptions to see whether they stand the test of time.
To formulate a testable hypothesis for our research effort, we asked whether or not the thousands of organizations we studied adhere to three practices that are generally considered to be the essential elements of good management:
1. Targets: Does the organization support long-term goals with tough but achievable short-term performance benchmarks?
2. Incentives: Does the organization reward high performers with promotions and bonuses while re-training or moving underperformers?
3. Monitoring: Does the organization rigorously collect and analyze performance data to identify opportunities for improvement?
Our teams of researchers asked managers open-ended questions designed to ferret out details about how their companies were – or were not – implementing these practices. We learned that our indicators of better management and superior performance are strongly correlated with measures such as productivity, return on capital employed and firm survival. Indeed, a one-point increment in a five-point management score that we created – the equivalent of going from the bottom third to the top third of the group – was associated with 23 percent greater productivity.
Transforming Manufacturers
When we began assessing management practices, we focused on medium-sized manufacturers, both independent and multinational-owned companies that had 50 to 5,000 workers. With more than 100 researchers accumulating data since 2004, our sample has come to include more than 8,000 firms in 20 countries in the developed and developing worlds.
Examples of bad management were easy to find.
For example, a manager at a privately held manufacturer in France, with about 500 workers, was hamstrung by his firm’s inability to motivate employees. Union pressure and labour regulations meant that workers effectively had jobs for life. The only way he could balance his production line was to team up poor employees with star performers, but this practice prevented stars from earning team bonuses and eventually drove them out of the company.
Are organizations more likely to succeed if they adopt good management practices?
The answer to that question may seem obvious, but economists prefer to test such long-held assumptions. An economist-led, international research effort conducted for the past decade reveals that poor management is rampant and that most leaders of poorly managed institutions are unaware of the deficiencies. When manufacturers were systematically taught how to implement good management’s basic features – targets, incentives and monitoring – performance improved measurably and dramatically.
Bringing these fundamental best practices to the wide array of companies, schools and hospitals that need them can ultimately increase wealth and can substantially improve education and health care. A call for “better management” may not seem like a cutting-edge idea, but given the potentially large effects on incomes, productivity and delivery of critically needed services worldwide, it may actually be a radical one.
Using a business-assessment tool we developed with McKinsey partners John Dowdy and Stephen Dorgan, we determined an average overall management score for each organization. Low scores abounded. More than 30 percent of U.S. firms and more than 70 percent in Brazil, China and India scored a three or lower. These firms fail to collect even the most basic performance data and offer few employee incentives.
When we started, facilities were often dirty and unproductive, and accidents were common. Even though wages were low, the company’s profits were meager.
The intervention transformed the plants that had received help. On average, they cut defects by more than 50 percent, reduced inventory by 20 percent and raised output by 10 percent. Productivity at one factory increased by almost 20 percent, and average profits rose by what we estimate to be roughly 30 percent. Safety also improved.
@Beyond The Factory Floor
Having seen the effect on manufacturing operations, we expanded our research to other kinds of organizations. So far we have conducted interviews at 1,000 schools in the U.S., U.K., Germany, Italy, Sweden and India, and at 1,300 hospitals in those countries and in France, ranking each of the organizations in much the same way as we ranked the manufacturers.
Our management scores showed that, overall, schools and hospitals are even more poorly managed than manufacturing companies. A nurse in the U.K. told us that her hospital didn’t store bed linens on each floor. One evening, she went to a different floor to get new linens for a patient; upon returning, she found that another patient had died from a seizure. With no process for monitoring or correcting problems like this, the linens policy persisted two years later.
What To Ask Your Managers?
Interviews with plant managers at more than 8,000 manufacturers in 20 countries revealed which management practices are actually being used on the front lines. Here is a small sampling of interview topics and related questions. For more detail, go to worldmanagementsurvey.org.
+ Interconnection of targets: “How are goals cascaded down to the individual workers?”
+ Clarity and comparability of goals: “Does anyone complain that the targets are too complex?”
+ Consequence management: “How do you deal with repeated failures in a specific business segment?”
+ Instilling a talent mind-set: “How do senior managers show that attracting and developing talent is a top priority?”
+ Removing poor performers: “How long is under performance tolerated?”
+ Unique employee-value proposition: “What makes it distinctive to work at your company?”
+ Retaining talent: “What does the company do about a star performer who wants to leave?”
+ Continuous improvement: “How do problems typically get exposed and fixed?”
+ Performance tracking: “What key indicators do you use for performance tracking?”
+ Performance dialogue: “For a given problem, how do you identify the root cause?”
The public sector is also strikingly bad at rewarding good employees and dealing with underperformers. One U.S. high school principal confided to us about a teacher who spoke so quietly that her pupils struggled to hear her, and grades were often poor. The principal had repeatedly offered training to help the teacher, to no avail, so the poor teaching continued year after year.
Comparing management practices with outcomes, we found that high-scoring schools have better exam results: A one-point improvement in the management score is associated with about a 10 percent jump in student test performance. Similarly, at hospitals, a one-point management-score increase is associated with a 0.5 percent lower 30-day mortality rate for heart attack victims who are admitted to emergency rooms.The example of Virginia Mason Medical Center, in Seattle, illustrates what can happen when a health care organization makes a concerted effort to improve management practices. In 2002 it introduced procedures, such as extensive performance monitoring and weekly team meetings, inspired by the Toyota Production System. These changes dramatically improved patient care. In the breast clinic, for example, the average elapsed time between a patient’s first call and a diagnosis dropped from three weeks to three days. The changes returned the hospital to profitability after years of losses.
Author Note: Nicholas Bloom, Raffaella Sadun and John Van Reenen
