ADD VALUE?
Two studies – undertaken years apart and based on the results of an experiment involving several Indian textile companies – provide interesting insights on whether management consulting is effective.
It should not come as a surprise that good managers are vital for corporate success. Early economists like Alfred Marshall, back in the 19th century, had noted the importance of good management practices to drive productivity. But because managers’ behaviour is such a difficult thing to quantify, economists have struggled to measure how important good management practices are in explaining a firm’s success. 2008 and 2010, they conducted a large field experiment in India.
They approached large, multi-plant Indian textile firms and divided them into two groups. One group – the treatment group – was given five months of extensive management consulting by a large international consulting firm. This included a month of diagnosis, where the consulting firm would find opportunities for improvement, followed by four months of intensive support for the implementation of these strategies.
In contrast, the other group – the control group – received only one month of diagnostic consulting, but no intensive follow-up. At the end of the study, in 2011, the researchers tested the performance of the firms in the two groups. The results, published in The Quarterly Journal of Economics in 2013, were quite remarkable. Even with just four months of follow-up, those in the treatment group saw an increase of 11 % in productivity, and an increase in annual profitability of about $230,000.
Interestingly, firms also spread these management improvements from their treatment plants to other plants they owned, creating positive spill-overs that resulted in returns that far outstripped the initial investment.
What made the difference? The authors suggest two reasons for the improvements. Firstly, owners delegated greater decisionmaking power over hiring, investment and pay to their plant managers. “This happened in large part because the improved collection and dissemination of