How Middle Managers Make Countries and Businesses More Successful

The search for better economic policy.
Jan. 25 2013 2:29 PM

Management Consultants Can Save the World

Inventory controls, workplace efficiency, and more paperwork help countries and businesses more than you can imagine.

Is good management undervalued?
Is good management undervalued?

Photograph by Mediaphotos/iStockphoto.

The global elite have again descended on Davos for their yearly pundit-fest. Prognostications have been made, as have commitments to save the world, end poverty, and clean up the environment. But with a minimum  entry cost of $19,000—not to mention the inflated prices for food and accommodation—the resort is filled with rich businesspeople and executives with giant carbon footprints and little firsthand knowledge of poverty.

What they do know well is how to manage companies effectively. And that’s what they should talk about. Because management, despite its horrid reputation, has the power to transform the world. By exporting better management to the rest of the world, we could raise standards of living dramatically and really make the world a better place.

How can management be the world’s salvation? Let’s consider the facts. First, better management produces more efficient companies that boost economic output, which may ultimately translate into higher incomes and wealth for the world’s poor.

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Need proof? A recent experiment by World Bank and Stanford researchers, described in greater detail in a prior Slate column, illustrates the dramatic impact of management “technology” on the way companies are run. In partnership with the consulting firm Accenture, the researchers randomly assigned a management makeover to a handful of Indian textile firms, while at the same time following a set of control textile factories to benchmark the effects of good management.

Out of chaos, order arose: Supply closets were no longer strewn about with yarn, factory floors were cleaned up, inventory and control processes improved production line efficiency. The benefits of good management were such that Accenture’s services—which were provided to the companies for free as part of the experiment—would have paid for themselves through greater profitability within a year: The researchers estimated a profit increase of more than $300,000 annually as a result of management improvements, as compared with the $250,000 market price of the consulting services they received.

What brought about these changes? Exactly the sorts of things that the managers of Davos are good at: designing incentives, ensuring clear and well-defined assignments of tasks and responsibilities, putting in place protocols to manage and track inventory and production. These are not new ideas. They have been the standard protocols of much-maligned managers since they first appeared on the scene with the advent of transcontinental railroad. It’s just that management, despite its age, is not evenly distributed around the world.

And while you might balk at the idea that what worked for Indian textile factories will work elsewhere, the truth is that much of the world is, by the researchers’ definition, poorly managed. Together with economists at the London School of Economics and Harvard, they have surveyed management practices around the globe. While India’s managers held the bottom ranking, those from China, Brazil, Greece, and Argentina weren’t that far ahead of them. (The researchers’ data are available at worldmanagementsurvey.org.) There are spectacularly well-managed firms in all of these countries—the China Telecoms and Tatas of the world—but the average firm has a lot to gain from some managerial guidance and expertise. (The countries with the leading management practices are, unsurprisingly, the United States and Japan.)

This is not just about increased efficiency in the private sector, as important as that may be. While nonprofit firms and governments clearly face different management challenges than private firms, the evidence suggests that sectors like education and health care could also benefit from better management. The global management survey has also analyzed the link between management quality and organizational success in these areas, and found that better management is associated with, among other things, higher student test scores, better heart-attack survival rates, and shorter patient wait times. Yes, it’s the hospital manager, at least as much as the heart surgeon, who will save your life.

If the purpose of Davos is for the rich and famous to gather for esoteric yet superficial discussion, to make business deals, and to bask in their own splendor, then maybe they’ve got the model just about right. But if the World Economic Forum, which organizes the Davos event, wants to make good on its mission of “improving the state of the world,” it would do well to focus their mountaintop discussions on how to export what they really know: their management skills. Better management stands a far greater likelihood of making the world wealthier and healthier.

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.

Tim Sullivan is the editorial director of Harvard Business Review Press. Follow him on Twitter.