Does better management improve performance?

What a question, you might say. Clearly, if management’s job is to make organizations function and enable human beings to collaborate and produce results, then better management produces more and better results, right?

It’s what all of us working in management development believe: first, that management can be improved and second, that improved management leads to better performance. But is it true?

I was recently asked to present evidence for this most basic assumption — and I must admit that I failed to do so on the spot. Picture my embarrassment. If there’s a “quant guy” out there, it’s me: I’m a computer science major with an MBA who worked for McKinsey. And here I am, running around trying to convince my clients to invest in strengthening their management skills and practices without any evidence that this is a good investment of their time and money? All I had on offer was a strong belief and some common sense rationale. But hard evidence?

So I did some desk research — and to my surprise it was harder than I thought. Thankfully, I eventually found some hard evidence and I thought I’d share it with you in the hope that it may save you from a similar moment of embarrassment. Or better: to strengthen your motivation and belief that you’re doing the right thing. So here’s the evidence I found that management actually works.

Linking the quality of management directly to performance

• The Boston Consulting Group (BCG), in “Realizing the Value of People Management” finds that companies most capable in people management practices outperform their less capable counterparts with 350% higher revenue growth and 210% higher profit margins. The same study finds 99% higher share price growth for “people” companies (those that ranked at least 3 times in the Fortune “100 best companies to work for” between 2001–2011).
• Zenger Folkman, in “How extraordinary leaders double profits” find that the 10% “great” leaders generate 200% higher profits compared to the 80% of merely “good” leaders.
• Laurie Bassi and Daniel McMurrer, in “Maximizing your return on people” (HBR 2007) found annual profit growth rates 60%-130% higher for business units with great management vs. those with not so great management.
• Nicholas Bloom (Stanford), Raffaella Sadun (Harvard) and John van Reenen (LSE) in “Does Management Really Work” (HBR 2012, based on www.worldmanagementsurvey.org) produced what is probably the most comprehensive body of evidence. Even though their assessment of management quality is based the most basic of criteria (1. Targets: does the organization support long term goals with with tough but achievable short-term performance benchmarks?, 2. Incentives: does the organization reward high performers with promotions and bonuses while retraining or moving under performers? and 3. Monitoring: does the organization collect and analyze performance data to identify opportunities for improvement?) their findings are amazing. They found a strong correlation between better management and measures of productivity(eg, going from bottom third to top third in management means 23% higher productivity). They also found that management shapes the performance of national economies, eg, a quarter of the 30% productivity gap between the US and Europe can be explained by management quality alone. In an experiment with manufacturing plants in India they found that plants which implemented the three basic practices cut defects by 50%, reduced inventory by 20%, increased profits by 30% within a year compared with those that did not. Interestingly, their findings could be replicated in schools (70% drop in failing students) and hospitals (significantly lower mortality rate of heart attack victims admitted to emergency rooms).

Linking employee engagement to performance

Granted, this is an indirect link — but if we can assume that better management improves employee engagement, then these are also interesting numbers:

• The Corporate Leadership Council (CLC), in a study of 50’000 employees in 59 organizations in 27 countries found engaged companies grow profits up to 300% faster than their less engaged competitors.
• Towers Watson, in “The Global Workforce Study” (2012) find high engagement companies enjoy 280% higher profit margins compared with low engagement companies.
• Gallup, in “State of the Global Workplace” links top quartile engaged companies to 21% higher productivity and 22% higher profitability compared to bottom quartile companies.

Other measures of management quality and its impact

• Proudfoot Consulting in a major study of 1’300 private sector companies found that on average only 59% of work time is productive — and that the major reason for this is bad management.
• Google, in “Project Oxygen” (see HBR article “Do Managers Matter?”) convinced its highly skeptical engineers that even the “smallest incremental increases in management quality were quite powerful”. The firm-wide study found tight connections between management quality and employee satisfaction with collaboration, innovation, work-life balanceand career development.
• McKinsey, in “Beyond Performance” (Colin Price, Scott Keller) links “organizational health” (itself linked to a critical set of management practices) to business outcomes. Top quartile “healthy” companies are 220% more likely to have above-median financial returns than lower (not bottom!) quartile ones. The study also found that 70% of organizational change efforts fail, with 72% of the factors contributing to these failures directly linked to poor management.

Does this mean we can rest our case? Yes and no. On the one hand, there is strong and convincing evidence that great management works. Yes, the skeptics will always find it easy to zero-in on a specific data point and question the methodology behind it, its validity or relevance in other contexts. But that does not worry me too much — in these cases I simply move on to more constructive contemporaries who are willing to give me (and management) the benefit of the doubt, see the big picture and use their common sense a bit.

On the other hand, there is still way too much work being done in the area of management (books written, theories presented, development programs launched, to name just a few) without the necessary rigor of looking for evidence that the suggested “silver bullet x” for “management problem y” actually works and produces real results. And I don’t mean books sold, articles published and consulting fees generated. That’s not helpful for all of us truly committed to improving the practice of management.

Even though this little desk research exercise ultimately confirmed my deeply held assumptions, I’m still walking away humbled and committed to be more rigorous in assessing the performance impact of my own work. After all, management is here to produce results. Maybe us consultants, coaches and trainers could practice a little more of what we preach and lead by example?

What other evidence do you have that management matters — and works? I’m keen to hear from you and hopefully we may grow this little collection of evidence together.