Competent Management: Getting the Basics Right

Federal agencies are currently in the midst of developing grand reform plans and four-year strategic plans to submit to OMB this week. But sometimes it is worthwhile to stand back and look at whether you’re doing the basics right.

A new article in the Harvard Business Review by a team of researchers led by Raffaella Sadun, Nicholas Bloom and John Van Reenen, have done just this, for private sector companies.  But their lessons apply in government as well, observing: “Core management practices can’t be taken for granted.”

Their research confirms quantitatively that: “Firms with strong managerial processes perform significantly better on high-level metrics such as productivity, profitability, growth, and longevity.”  However, they also found via extensive interviews that “ . . . competent management is not easy to replicate.”  They found: “Achieving managerial competence takes effort, though: It requires sizable investments in people and processes throughout good times and bad.”

What did they do?  Over the past decade, this team of researchers identified a handful of 18 key management practices that seem to be critical to operational excellence, such as setting clear goals and metrics, and choosing the right targets to pursue.  They grouped these practices into four areas: operations management, performance monitoring, target setting, and talent management.  Statistically, they learned that “their adoption accounts for a large fraction of performance differences across firms and countries.”

They interviewed managers from more than 12,000 companies in 34 countries about their use of these management practices, rating each practice on a scale of 1 to 5, where higher scores represent a greater rate of use.

What did they find? The researchers saw big differences across countries in the use of the various management practices, but observed that 60 percent of the variation tended to be within countries.  In aggregate, they found 11 percent had an average score of 2 or less (poor), while 6 percent had an average score of 4 or better (good).

Particularly interesting was when they focused specifically on U.S. firms using U.S. Census data they found “variation in management practices inside firms across their plants accounted for about one-third of total variation across all plant locations.” This was particularly true in large companies “where practices can differ a great deal across plants, divisions, and regions.” The bottom line: some parts of large companies are well-managed, but others are not.

Another interesting finding was that large gaps in basic managerial practices “were associated with large, persistent differences in firm performance.”  They found that if a firm were to move from being rated in the lowest 10 percent to the highest 10 percent of management practices, the this would result in 25 percent faster annual growth, 75 percent higher productivity, and increased profits. The bottom line: operational excellence matters!

What causes the differences they found?  Some of the variation between firms was driven by external factors, such as the intensity of competition or different levels of government regulations in different industries and countries.  But these external factors were not the driving force.  Most of the differences could be traced to internal actions in the firms studied.  These include:

• Inability to see reality. Most managers were under the false belief that their organization was doing fine.   In fact the researchers found: “Most managers have a very optimistic assessment of the quality of their companies’ practices”—but “we found zero correlation between perceived management quality and actual quality (as indicated by both their firm’s management scores and their firms’ performance), suggesting that self-assessments are a long way from reality.” The researchers said it was imperative to provide good quality information to managers so they can be more objective about their performance.
• Hierarchical governance structure. The researchers looked at different kinds of organizations and found that family-run enterprises – which tend to be hierarchical with little delegation of authority — had the lowest average management scores. They noted that government organizations ranked only slightly higher!  In contrast, they found that “higher management scores tend to go hand-in-hand with more-decentralized decision making.”
• Lack of good management skills. They found that “Good management practices require capabilities (such as numeracy and analytical skills) that may be lacking in a firm’s workforce, especially in emerging economies.”
• Organizational politics and culture. Even when managers can see their problems, they sometimes are stymied in addressing them by the larger organizational context in which they are located.  For example, the researchers point to General Motors’ historical inability to adopt the highly vaunted Toyota Production System because of long-standing adversarial relationships between management, suppliers, and blue-collar workers. The researchers said that these conditions made it impossible to introduce the use of trust-based teams and joint problem solving techniques. They said that it is possible to overcome such barriers, but that top leaders need to be visibly present and constantly communicating the value of making change happen.

The researchers also found that “management quality was significantly higher in organizations in which the CEOs dedicated a larger portion of their time to employees than to outside stakeholders.” This is counterintuitive to much of the advice given top leaders, which is to focus on external customers and trends in their industry.

How does this relate to federal agencies?  Government agencies strive for operational excellence, as well. This is often a key goal in many of their strategic plans.  In fact, there are a number of efforts to gauge and encourage it.  These include:

• The Office of Personnel Management’s annual Federal Employee Viewpoint Survey that monitors the pulse of employee engagement,
• The General Services Administration’s annual Benchmarking survey that gauges and compares the effectiveness of agency-level mission-support services, such as contracting, human resources, and tech services.
• The long-running U.S. Government Accountability Office initiative that focuses on improving agency performance in High Risk Areas that could subject the federal government to significant costs if not managed properly, such as the Defense supply system.
• A new Operational Excellence in Government project at Harvard’s Kennedy School that promotes greater efficiencies, such as cost savings in financial management.

Conclusion. There is currently no overarching set of metrics used in U.S. federal agencies to gauge organizational effectiveness.  However, there are models in other countries that might serve as an inspiration.  For example, New Zealand has developed a Performance Improvement Framework model that it has used for over seven years.  There are corporate models as well, that have international reach such as Danaher, Nike, and Moleskine. The researchers behind the Harvard Business Review article conclude: “Core management practices, established thoughtfully, can go a long way toward plugging the execution gap and ensuring that strategy gets the best possible chance to succeed.” And this is true for government as well as the corporate world!

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