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HBR McKinsey Award winners: Good management matters more than we realize

The winning spread as it appeared in Harvard Business Review’s September-October 217 issue.

– This spring, we announced the winner of the HBR McKinsey Award for the best Harvard Business Review article of 2017: “Why do we undervalue competent management?,” by professors Raffaella Sadun, Nicholas Bloom, and John Van Reenen. While headlines might herald technological innovation as the mover and shaker of today’s economy, this trio’s research uncovers the outsize impact of good management practices on a company’s—and by extension, entire countries’—growth. The authors, who are based in the United States, created a massive body of research on this topic for more than 15 years.

Since 1959, the HBR McKinsey Awards have recognized practical and groundbreaking management thinking by determining the best articles published each year in Harvard Business Review, as determined by an independent panel of business and academic leaders with input from members of HBR’s Advisory Board. This year’s announcement appears in the May-June issue of the magazine.

We sat down recently with Raffaella and John to learn more.

What inspired your research? Why this topic?

John: I’ve always been really interested in productivity models and growth because they are part of why countries become wealthier over time. Understanding productivity growth and why there are such stark differences between firms or between countries has been a big mystery for economists, social scientists, and business people for decades. Most folks intuitively understand that management practices are important, and McKinsey has done great work to understand these practices. The question was, just how important are they?

We started doing the grunt work—the first big survey of firms, 732 companies in France, Germany, the UK and the US—in 2004. Now, we have 20,000 interviews from 34 countries.

Around 15 years ago, a prominent scholar came to do a talk at LSE (the London School of Economics and Political Science) on behalf of the British government to discuss why the UK’s productivity growth was so low. At dinner after the talk, I asked him if he thought management practices had anything to do with it. He didn’t think so — but admitted that no convincing evidence existed, one way or the other. I was sitting next to a senior partner from McKinsey, so I asked him, “Well, what do you think?” And he said, “I think that’s right – management is a factor in Britain’s weaker performance.”

From that conversation, we started talking about how McKinsey and other consulting firms approach companies, conduct initial diagnostics, try to get ideas about basic management practices, collect information, and use that for improving targets and incentives. That was the start of it—thinking about how you can measure management practices systematically across companies, industries, and countries.

We started doing the grunt work—the first big survey of firms, 732 companies in France, Germany, the UK and the US—in 2004. Now, we have 20,000 interviews from 34 countries. And the research is not just from manufacturing companies but also hospitals, schools and retailers. And other researchers are applying the methods to many other sectors.

How did you come to work together on this?

Raffaella: I had just started my PhD at LSE. That was a time when few people were looking at micro-level data from companies. The project could uncover productivity differences within countries, and even compare development and growth across countries—it was phenomenal. I got the research bug from John and Nick, who had just started working on this. The partnership started from that, in 2003.

This database sounds like it has been an epic undertaking.

Raffaella: We collected the data via phone interviews over four or five waves of data collecting. And every time we’d do a wave of data collection, we’d convert a conference center into a call center, select large teams of MBA students (at one point we had a team of 40 people just within a summer), and work with them for about three months. This is an effort that’s involved many, many people over time.

If that moment of mutual understanding between the workforce and the management doesn’t happen, you basically have no chance.

John: We have hundreds of students and other researchers who have been part of this project. It’s spawned a whole community of people who are very interested in getting a better idea of what’s going on with management around the world.

What sort of questions were on the survey? What were the practices you were checking for?

Raffaella: They’re the basic processes. As John was saying, these were things previously recognized as processes that existed in high-performing firms. They’re typically not capital intensive, either. Our survey consists of open-ended questions across four domains: production monitoring, targets, people management, and lean management.

For example, the questions we ask about production monitoring include a question that asks our interviewees—the plant managers—how they keep track of their production. It’s very open-ended, and we ask for examples. Some plant managers would say they had very few systematic ways of keeping track of what was happening on the shop floor or that even if they had some system in place, it was not providing information that was actionable: the data was not visualized, or it was not accessible to people who would make good use of it. In our scoring system, that would be a place that doesn’t adopt a good process when it comes to monitoring of production.

At the other extreme, you have companies that take these monitoring processes seriously. The surprise, looking at the data, is that even if we know that these things are intuitively basic, there’s tremendous variation in how these basic practices are adopted across companies.

Out of all of this data, and your analysis, what surprised you most?

Raffaella: Even the fact that there was a variation in management practices was a surprise, to some extent. It’s something that economists and business people would not expect: these disciplines more or less say, if you’re really badly managed, you shouldn’t be in business; or if a process is really beneficial to firm performance, it should be quickly imitated. We should try to understand better what drives this variation. Why, if these processes are known and basic, are certain organizations so slow to adopt them?

John: I totally agree. One of the things we did toward the end of the survey was ask the question, “How well do you think your firm is managing itself, on a scale of one to ten?” It turned out, most people think they’re absolutely awesome managers. The vast majority thought their firms were really well managed. What was more surprising, and maybe a bit depressing, was that the answer to that self-assessment—contrary to the objective scoring done in the interview—was totally uncorrelated with any measure of performance or productivity. What I take from that is, one of the barriers to the diffusion of good management practices is that many companies really don’t know how badly managed they are.

What’s the relationship between workforce learning and management?

Raffaella: I think this is a fundamental point that’s often missed because there’s a very mechanistic way of looking at the workforce. It turns out that really implementing these practices requires that everyone has a fundamental understanding of them and believes in them. The workforce really needs to buy into the value of management processes and trust that you’ll share in the growth that results. If that moment of mutual understanding between the workforce and the management doesn’t happen, you basically have no chance. So perhaps some of the problem is training, but it is also the softer part of the relationship between workers, managers, and owners.

John: One of the interesting things is that people often think it’s all about the talent, or the ability, or the education of the managers to determine whether or not management practices are successful. And, yes, we see that in our data: the managers who are more able seem to have better practices. But we also find that just as important is the training and education of the workforce. It’s profoundly misleading to think it all comes down to the single person on top.

One thing you want people to understand about your research?

John: My main thing: management really matters. Not just for the particular organization you happen to be in; it actually matters much more widely across the whole country that you’re living in. It matters in terms of understanding the wealth of nations. People underestimate its importance.

Raffaella: I agree completely. And you can go beyond that. One of the most rewarding things about this project is that we can see in the data that these processes are correlated with things that everyone cares about, like surviving a heart attack in a hospital and making sure your kids get a good education.

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