A new study demonstrates just how important bureaucracy and paperwork really are.

Commentary about business and finance.
Oct. 13 2010 1:05 PM

In Defense of Middle Management

A new study demonstrates just how important bureaucracy and paperwork really are.

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Better management also led to a further round of changes in the factories, separate from those instituted by Accenture's consultants. All of the new monitoring and control mechanisms created a flood of information that had the potential to overwhelm the factory boss. So not surprisingly, the Accenture factories also began using computers more intensively following the changes in management practices. (This was probably good for the job prospects of computer-literate workers, less so for unskilled laborers now at risk of being made redundant by the factories' improved efficiency.) Equipped with new detail on the operations of each individual factory, the company boss might feel more comfortable yielding greater discretion to each factory manager; any drop in production—or mysterious disappearance of yarn from the supply room—would raise red flags at the head office. Indeed, the researchers found more delegation of responsibility to factory managers after the new management practices were put in place. Previously, without a way of keeping an eye on middle managers, owners had been limited in their ability to expand and often employed immediate family members who could be trusted to keep their hands out of the till. (When Bloom asked the owner of the most efficient company among the 17 in the study why he hadn't expanded beyond a single plant, he shook his head sadly and answered, "No sons.")

It turns out that the management shortcomings of Indian textile firms are hardly unique. In an earlier study, Bloom worked with a pair of London School of Economics researchers to conduct a worldwide survey of management practices, using metrics of management quality similar to those employed by Accenture.   They hired MBA students to interview managers at corporations in 17 countries. India ranked third from the bottom—just behind Brazil and one position ahead of China. Together, these three terribly managed economies constitute nearly 40 percent of the world's population.

Not surprisingly, the top positions in the global management survey were held by some of the world's richest nations: The United States, Germany, Sweden, and Japan took the top four spots. Why can't Indian managers learn to run their factories more like German ones? And if they can't do it themselves, why aren't more of them hiring Accenture to help them out? The study's authors asked the factory owners themselves why they hadn't already done so. About one-third were simply unaware of many managerial practices—like preventive maintenance to keep machines from breaking down—that are commonplace in most modern factories. Even if they were aware of the practices, they didn't think they could be profitably applied to their own circumstances—after all, the market value of Accenture's five months of free consulting was around $250,000, so it's easy to imagine the price tag might scare off would-be customers who might doubt that the boost in profits would be enough to justify the expense.  

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The study's findings suggest that we might do well to direct at least some of our aid funds toward building business schools in India and elsewhere in the developing world to provide their economies with the consultants and middle managers they need to create the corporate bureaucracies we so love to hate in America. Study co-author David McKenzie argues that another implication is that India should allow more multinationals to set up shop to serve as training grounds for managers. Of course, these multinationals will also drive the worst-managed Indian companies out of business, making this proposal a tough sell in a country with a history of economic nationalism.

And what of the cubicle dweller lamenting the injustices of the modern office? When the 38 principles of good management meet the realities of running an organization with tens or hundreds of thousands of employees, what results is a rigid set of rules, regulations, and constraints that can seem designed to make office life a pointless misery. But it's also what allows the modern corporation to avoid the chaos of the unmanaged cotton weavers of Mumbai.

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Ray Fisman is a professor of economics at the Columbia Business School and co-author of The Org: The Underlying Logic of the Office. Follow him on Twitter.

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