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.

Before: Flammable garbage in a plant. Click image to expand.
Before: Flammable garbage in a Mumbai textile plant

Imagine a world without middle managers. If you've done time in a cubicle, you might picture a paradise where workers are unshackled by pointless bureaucracy, meaningless paperwork, and incompetent bosses. A place where stuff actually gets done.

Despite a proliferation of management gurus, management consultants, and management schools, it remains murky to many of us what managers actually do and why we need them in the first place. A new World Bank-Stanford study titled "Does Management Matter?" provides an answer. Working in collaboration with the consulting firm Accenture, the researchers randomly selected a set of textile factories in India to receive a complimentary five-month management makeover and compared the profitability and efficiency of these revamped factories with a control group of factories that continued doing business as usual. It turns out management does matter: The consultants boosted productivity by around 10 percent by improving quality, managing inventory, and speeding up production.

The study's authors enumerate 38 practices that define good management. These include routines to record and analyze quality defects, production and inventory tracking systems, and clear assignment of job roles and responsibilities. While all this sounds reasonable enough, keep in mind that this is also a set of practices that has the potential to create a Dilbert-esque world of unwieldy reporting requirements, Big Brotherly monitoring, and rigid protocols that blunt creativity and innovation. (If you doubt any of this, just think about the last time you filed an expense report.)

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To assess whether good management thus defined was good for business, the World Bank hired Accenture to provide its usual advice—essentially, to implement the 38 elements of good management—for a group of midsized textile companies that specialize in cotton weaving in the area around Mumbai. The researchers initially approached 66 firms; 17 (with 28 factories among them) agreed to be guinea pigs in the management experiment. Fourteen factories were ultimately provided with the full consulting experience while six others served as a comparison group to benchmark the improvements that came with "better" management.

For Stanford professor and co-author of the study Nick Bloom, to observe the chaos that reigned in the cotton weaving factories before the consultants arrived is to glimpse a world without managers. Bloom recounts seeing store rooms strewn with rotting yarn , unsorted by color, quality, or any other attribute—employees had to rummage about to find the requisite product, if it was there to be found at all. Factory floors were a mess, hallways blocked by heavy machinery and littered with discarded tools. Equipment was dirty, unkempt, and often well past expiry dates. On average, the companies in their sample were using only around 10 out of the 38 best practices on the consultants' list.

Before the consultants rolled up their sleeves, each of the 20 factories received a one-month diagnosis of its management and performance. This was effectively an initial management-health check. The 14 factories selected to work with Accenture then received four months of management practice upgrades. For the most part, the same managers were kept in place, but the previously ad hoc ways of getting things done were replaced by the standard protocols of modern management. Finally, Accenture did a follow-up evaluation in all 20 factories to assess whether performance improved after the consultants' intervention.

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After: Textiles at the plant have been organized and racked

The before/after photographs of stockrooms and production lines tell pretty much the whole story (some of these photos are reprinted in the study's back pages). Out of disarray and confusion, there arose order: In storerooms, bags of yarn were now stacked, carefully arranged, and elevated to protect against dampness. Offices previously cluttered with random stacks of paper were now equipped with charts to prioritize and track the flow of inputs and outputs working their way through newly organized assembly lines. Defects were cut in half and inventories fell by nearly 20 percent, even as output increased by 5 percent. Overall, the authors calculate that profits at each factory—assuming the new practices remained in effect—would improve by more than $200,000 per year.  

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.  

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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