Does management work?

Returning, then, to Chris Dillow’s question (see previous post). Does management make any difference to organisations or is it simply a series of rituals used to justify the rewards and positional power of executives? Are managers just witch-doctors who claim success when their mumbo-jumbo works and blame external factors when it doesn’t?

Most of us must have wondered, as we’ve worked through the annual appraisal round, or sweated over the design of a new performance management system, or argued over the criteria for identifying the next generation of leaders, whether any of it actually makes any difference at all.

Well the good news is that, according to the World Management Survey, it does. Researchers from top business schools, including the LSE, Harvard and Stanford, have studied some 10,000 organisations over the past seven years and have identified eighteen management practices that correlate with a number of measures of business success, such as productivity and profitability. These practices cover three broad areas:

1) monitoring—how well do companies monitor what goes on inside their firms and use this for continuous improvement;

2) targets—do companies set the right targets, track the right outcomes, and take appropriate action if the two are inconsistent?

3) incentives—are companies promoting and rewarding employees based on performance, and trying to hire and keep their best employees?

The list below shows how these dimensions apply to manufacturing organisations but equivalents were developed for other industries (see page 206):

 The Management Practice Dimensions    

  1. What aspects of manufacturing have been formally introduced, including just-in-time delivery from suppliers, autonomation, flexible manpower, support systems, attitudes, and behavior?
  2. Were modern manufacturing techniques adopted just because others were using them, or are they linked to meeting business objectives like reducing costs and improving quality?
  3. Are process improvements made only when problems arise, or are they actively sought out for continuous improvement as part of a normal business process?
  4. Is tracking ad hoc and incomplete, or is performance continually tracked and communicated to all staff?
  5. Is performance reviewed infrequently and only on a success/failure scale, or is performance reviewed continually with an expectation of continuous improvement?
  6. In review/performance conversations, to what extent is the purpose, data, agenda, and follow-up steps (like coaching) clear to all parties?
  7. To what extent does failure to achieve agreed objectives carry consequences, which can include retraining or reassignment to other jobs?
  8. Are the goals exclusively financial, or is there a balance of financial and nonfinancial targets?
  9. Are goals based on accounting value, or are they based on shareholder value in a way that works through business units and ultimately is connected to individual performance expectations?
  10. Does top management focus mainly on the short term, or does it visualize short-term targets as a “staircase” toward the main focus on long-term goals?
  11. Are goals too easy to achieve, especially for some “sacred cows” areas of the firm, or are goals demanding but attainable for all parts of the firm?
  12. Are performance measures ill-defined, poorly understood, and private, or are they well-defined, clearly communicated, and made public?
  13. To what extent are senior managers evaluated and held accountable for attracting, retaining, and developing talent throughout the organization?
  14. To what extent are people in the firm rewarded equally irrespective of performance level, or are rewards related to performance and effort?
  15. Are poor performers rarely removed, or are they retrained and/or moved into different roles or out of the company as soon as the weakness is identified?
  16. Are people promoted mainly on the basis of tenure, or does the firm actively identify, develop, and promote its top performers?
  17. Do competitors offer stronger reasons for talented people to join their companies, or does a firm provide a wide range of reasons to encourage talented people to join?
  18. Does the firm do relatively little to retain top talent or do whatever it takes to retain top talent when they look likely to leave?

But this is just common sense, protests Chris. Of course those that set clear goals and monitor them are more likely to succeed. So it seems, but we know that common sense isn’t always common or sensible. Often, things that we think are bleedin’ obvious turn out not to be. Chris, of all people, should know this because debunks received wisdom on his blog most weeks.

What the World Management Survey has done, as Harvard’s Raffaella Sadun explains, is to back up what we all thought was common sense with some robust statistical data. Some management academics, especially those that write the best-sellers, have adopted a case study approach; pick some good organisations and see what they do. As we have seen over the years, some of the organisations featured in books like In Search of Excellence and Good to Great don’t look so excellent or great after a few years. For obvious reasons, quantitative research on management practices is less common; it takes up a lot of time and getting access to so many firms is not easy. However, by studying so many organisations over so long a period, the World Management Survey has at least managed to demonstrate a link between good management and firm performance. It has also shown that the relationship between management and performance holds true across different countries and industries. There is a wealth of supporting data and articles on the World Management Survey site and on this LSE site too. (There is enough there for several more blog posts!)

But, objects Chris, (he really doesn’t like managers) this is all pretty mundane stuff.

What we have here, then, is not a story about CEO’s “strategic vision”, or about the power of great individuals, but about day-to-day administrative structures.

True enough, but for these administrative structures to be effective there must be some strategy behind them. I have worked in organisations where the directors either couldn’t or wouldn’t set any strategic direction. It becomes very difficult to design even the most basic performance management systems, assessment criteria or monitoring processes when you have no overall direction against which to validate them. In a strategic vacuum, identifying your core capabilities, or your criteria for identifying your future leaders or even your objectives for next year becomes very difficult. I would be very surprised if those firms which scored well on the administrative practices were run by leaders who were not giving at least some strategic direction.

So much then for the good news. However, as the researchers concede, there is still much work to be done:

The patterns we find in our large samples of management data lead us to believe that an important explanation for these large differences in productivity between firms and countries are variations in management practices. These are hard, but not impossible, to measure…

But:

There are several caveats to this. First, there are distinct styles of management, and some firms and countries do specialize in some clusters of our practices rather than others. Second, there are many management practices that are contingent such as strategy, finance, M&A and marketing. We deliberately focus in our work on a narrow subset of basic management practices for which best practices most likely exist, that is those practices that seem likely to raise the efficiency firms’ production of goods and services. Thirdly, there are other types of management such as leadership that are undoubtedly important to business success, but are much harder to quantify…

All of which suggests that Chris’s original point (which he cheerfully admits was an extreme stance to get some debate going) is well made. It is extremely difficult to demonstrate the extent to which management is the decisive factor in organisational success and failure, and this is especially true at the high-falutin’ strategy and leadership end for which people demand so much money. The World Management Survey has shown that management makes a difference but how much of a company’s success or failure is due to its leaders, and how much is due to those pesky ‘external factors’ is devilishly difficult to prove.

Hat Tip to Luis Enrique for posting the links to the World Management Survey. I was aware of this research but I had no idea just how much of it there is!

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7 Responses to Does management work?

  1. Pingback: Does management work? - Rick - Member Blogs - HR Blogs - HR Space from Personnel Today and Xpert HR

  2. Luis Enrique says:

    I think Chris was also making a slightly different point about top execs (see his response to my question here) – that as a class, any claims they have to possess super special leadership skills that make a big contribution, are phony.

    I think a good analogy might be football. We know good footballers make a difference because if we took the average Premiership team and replaced its footballers with players from the lower divisions, they’d get spanked in the Champions League. What about football managers? Any football club needs somebody[*] to pick a team, decide tactics etc. and these decisions matter so we know managers “make a difference” in that sense. But what if we took the average Premiership team and replaced its manager with a manager from the lower divisions? I think Chris is suggesting that this would not make much of a difference.

    I’m not sure that I agree with him, but this is an almost impossible question to answer empirically because the experiment is never performed.

    [*] we could imagine a football club managed by its players or fans, but we are holding organizational form constant for the purposes of this question.

  3. Stephen says:

    It is management systems (or processes) that are needed or which are critical. Managers can be trained easily enough. Whether they are good or not depends on their ability and motivation.The real challenge is the design of management systems (Lean, Balanced Scorecard, Culture etc). How many managers introduce new management systems into the organisations for which they work?

  4. Blue Canary says:

    The WMS work is certainly more thorough than what you get from the ‘celebrity’ management gurus but, because it relies on surveys, does not rule out either false attribution or the halo effect, so shouldn’t be considered especially scientific.
    But, putting aside the methodological objections, if you take the study at face value it actually disproves your thesis that leadership matters. How so? Well, if success in business can be reduced to a simple checklist of activities which any idiot can implement, and management activities at that, then it doesn’t really matter who you have in charge as long as they follow the procedures WMS recommend. In principle, to be a leader you’d need no more intelligence than someone who follows a process to put a Big Mac together. Not exactly a defence for million pound salaries…

    • James F says:

      I’m not arguing for million pound salaries, but I don’t think these points are correct.

      Regarding false attribution, the paper describes the double blind approach that was taken. Surveyors didn’t know what the company performance was when they carried out the work. Companies were selected for the research because they were likely to be below the size threshold at which they would have public profile and be known to the surveyors.

      Regarding the checklist argument, I think it’s tackled in the post. 1. Not any idiot can implement these procedures – see the evidence of the multiple companies studies which are profitable, but less profitable than those which exhibited the described behaviours. 2. The researchers are clear that these behaviours were studied simply because they are easily identified: there’s lots more to company performance that isn’t addressed by the study and they’re clear about that. What we can say, is that in the only respects that this research did look at management performance, it found it to have impact in terms of company financial performance against a range of metrics.

      • Blue Canary says:

        That’s not what I meant by false attribution. A number of studies have shown that when a company is successful its procedures are regarded positively by those who experience them, and vice versa. Experience at my own company bears this out. When we were performing poorly, our staff survey results stated that our HR procedures were poor. Now we’re performing well, responses to the same questions suggest our HR procedures are very good. Yet they haven’t actually changed at all. What the WMS surveyors knew or didn’t know would be irrelevant in addressing this research problem.
        On the checklist argument, if you follow your logic through and stick with the narrow argument of what the research shows (which the headline report from the original post doesn’t) then the conclusion has to be that the research doesn’t demonstrate anything at all.
        For the record I do believe that leadership matters – and even that top quality leadership may be worth a million pounds – but if it does it’s more to do with the ability to lead through change and uncertainty, not by implementing a series of standard management measures.

  5. Metatone says:

    Bit late but I realise that Private Equity is also fertile grounds for assessing how management can make a difference, particularly when the ropes of stock market conventional wisdom are loosened.

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