Wanted: Competent Management

Federal agencies are finalizing their grand reform plans and four-year strategic plans to submit to the White House Office of Management and Budget this week, but it’s worthwhile to stand back and look at whether they’re doing the basics right.

A team of researchers led by Raffaella Sadun, Nicholas Bloom and John Van Reenen has done just this in a new article in the Harvard Business Review. While their focus was on the private sector, their lessons apply in government as well, including this bedrock observation: “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 that competent management is not easy to replicate. It takes effort, and significant and enduring investments in people and processes.

Over the past decade, the 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.

When they focused specifically on U.S. firms, they found, not surprisingly, that  some parts of large companies are well-managed, while others are not. Large gaps in basic managerial practices “were associated with large, persistent differences in firm performance.” If firms moved from being rated in the lowest 10 percent to the highest 10 percent of management practices, 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 regulatory issues. 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. The researchers noted that “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.”

• 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. “Good management practices require capabilities (such as numeracy and analytical skills) that may be lacking in a firm’s workforce, especially in emerging economies,” the study found.
• 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 exist. 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. It’s possible to overcome such barriers, but top leaders need to be visibly present and constantly communicating the value of change.

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.

Lessons for Federal Agencies

Many agencies strive for operational excellence—it is often a key goal in many agency strategic plans. Fortunately, there are a number of efforts to gauge and encourage it, including the Office of Personnel Management’s annual Federal Employee Viewpoint Survey, which measures employee engagement; the General Services Administration’s annual benchmarking survey, which compares the effectiveness of services, such as contracting and human resources across agencies; the Government Accountability Office’s High Risk List, which highlights areas most in need of attention; and a new Operational Excellence in Government project at Harvard’s Kennedy School, which aims to promote greater operational efficiency.  

While there is currently no overarching set of metrics used in U.S. federal agencies to gauge organizational effectiveness, there are models 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.

Agency leaders should avail themselves of all these resources. The Harvard researchers were clear: “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.”