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Posts Tagged ‘productivity

Do management consultants really add value?

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management-consulting

That good managers matter for corporate success, should be a surprise to no-one. Early economists like Alfred Marshall, back in the nineteenth century, already noted the importance of good management practices to drive productivity. But because managers and the way they behave is such a difficult thing to quantify, economists have struggled to measure how important good management practices are in explaining firm success.

In 2008, five leading economists from Stanford University and the World Bank, tackled this difficult question. They wanted to know whether investing in good management practices improve productivity and profits, and so, between 2008 and 2010, they conducted a large field experiment in India. They approached large, multi-plant Indian textile firms and divided them in two groups. For one group – the treatment group – they gave five months of extensive management consulting through a large international consulting firm. This included a month of diagnosis, where the consulting firm would find opportunities for improvement, and 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, they 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 spillovers that resulted in returns that far outstripped the initial investment.

What made the difference? The authors suggest two reasons for the improvements: First, owners delegated greater decision making power over hiring, investment and pay to their plant managers. “This happened in large part because the improved collection and dissemination of information that was part of the change process enables owners to monitor their plant managers better.” Second, the extensive data collection necessary for quality control, for example, led to a rapid increase in computer use. Better information management resulted in better performance.

The concern with the study, though, was that it failed to measure the persistence in performance. Did the differences between the treatment and the control group wither away as soon as the management consultants left, or did they persist for a month, a year, or even longer? To answer this question, almost the same team of authors returned to India in 2017 to measure the performance of the firms eight years after the initial intervention. Their results appeared in an NBER Working Paper last month.

It seems that management practices do persist. Despite the fact that several firms (in both the treatment and control group) dropped some of the management practices that were initially proposed by the consultants, the difference between the two groups were still large – worker productivity is 35% higher in the treatment group compared to the control group. The spillover effects, in particular, were still there: in fact, in most cases, the plants that did not receive treatment but were part of the same firm, were indistinguishable from the plants that did receive management consulting services. As the authors note: While “few management practices had demonstrably spread across the firms in the study, many had spread within firms, from the experimental plants to the non-experimental plants, suggesting limited spillovers between firms but large spillovers within firms”.

The authors were also able to collect information on the reasons certain management practices were dropped over the period of 8 years. Three reasons were frequently mentioned: the new management practices faded when the plant manager left the firm, when the directors, notably the CEO and CFO, were too busy, and when the practice was not commonly used in many other firms. “The first two reasons highlight the importance of key employees within the firm for driving management practices, while the latter emphasizes the importance of beliefs.”

There were other surprising consequences of intervention too. Not only was worker productivity higher in the treatment group, but treated firms continued to use consulting services in the years following the initial intervention, not only improving their operational management practices, but also their marketing practices.

Management consultants often get a bad rep, but random control trials like these – experiments that are costly and time-consuming – clearly demonstrate the advantages, in profits and productivity, of investing in good management practices. Successful firms thrive because of good managers. The key is to hang on to them, empower them with the ability to make decisions, and free up their time.

*This article originally appeared in the 1 March edition of finweek.

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Written by Johan Fourie

April 6, 2018 at 15:21

When diversity hurts

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‘Diverse People Unite’ is the motto on the South African coat of arms. Diversity is a great thing, we believe, because it exposes us to new peoples, new experiences and new ideas. But what if diversity also results in lower productivity? This is the uncomfortable result of a forthcoming paper in the Quarterly Journal of Economics, one of the foremost journals in the field. The paper, written by Jonas Hjort of Columbia Business School, provides evidence that suggests that ethnically diverse teams are less productive than ethnically homogeneous teams. Hjort writes:

A body of literature suggests that ethnic heterogeneity limits economic growth. This paper provides microeconometric evidence on the direct effect of ethnic divisions on productivity. In team production at a plant in Kenya, an upstream worker supplies and distributes flowers to two downstream workers who assemble them into bunches. The plant uses an essentially random rotation process to assign workers to positions, leading to three types of teams: (a) ethnically homogeneous teams, and teams in which (b) one, or (c) both downstream workers belong to a tribe in rivalry with the upstream worker’s tribe. I find strong evidence that upstream workers undersupply non-coethnic downstream workers (vertical discrimination) and shift flowers from non-coethnic to coethnic downstream workers (horizontal discrimination), at the cost of lower own pay and total output. A period of ethnic conflict following Kenya’s 2007 election led to a sharp increase in discrimination. In response, the plant began paying the two downstream workers for their combined output (team pay). This led to a modest output reduction in (a) and (c) teams – as predicted by standard incentive models – but an increase in output in (b) teams, and overall. Workers’ behavior before conflict, during conflict, and under team pay is predicted by a model of taste-based discrimination. My findings suggest that inter-ethnic rivalries lower allocative efficiency in the private sector, that the economic costs of ethnic diversity vary with the political environment, and that in high-cost environments firms are forced to adopt “second best” policies to limit discrimination distortions.

Pushed to the extreme, these findings suggest that, if South Africa’s businesses want to become more productive, then they should forget about the ‘Rainbow Nation’ and only employ people of the same ethnicity, i.e. Xhosas or Sothos or Afrikaners or Zulus. Businesses that opt for diverse teams will grow slower than businesses which employ only people from one ethnic group; in a profit-maximising, Darwinian world, the ethnically homogenous businesses will eventually win against the diverse but unproductive ones. Where businesses already employ different ethnicities, Hjort’s evidence suggests that it would be best to let those of the same ethnicity work together in teams instead of mixing team members across ethnicities. So much for ‘Diverse People Unite’!

Of course, things are not that simple, and it would be silly to conclude from this that diversity is evil. We should remember that most teams in the real world don’t assemble flowers into bunches; teams are often required to provide creative solutions to complex problems where innovative, out-of-the-box thinking is required. It seems reasonable to assume that ethnically diverse teams have a higher probability of dissimilar ideas than ethnically homogenous ones. In economics jargon, perhaps ethnically diverse teams are more prone to economies-of-scope rather than economies-of-scale. And a logical conclusion from Hjort’s work is that, were ethnic rivalries to disappear, the negative impact of diversity on productivity would all but disappear too.

But such results force us to stop and think about the untested assumptions we make. And it raises difficult questions too: even if our own labour and development economists find that diversity hurts our productivity, is there not a moral argument in favour of maintaining ethnically diverse teams? Given our history of forced racial segregation, how do we weight the ethics against the efficiency arguments? My expectation would be that some of the counter-productivity effects that Hjort finds will be mitigated over time by working with people from a different ethnic group, and that this in any event is the only way of addressing the issue at its core. As economists, we should understand the value in delaying instant productivity gains for even greater long-term benefits.

Written by Johan Fourie

October 15, 2014 at 09:39

Nashuanomics

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FlyingcarMy favourite programme on South African TV in the 1990s was Beyond 2000, a programme which showcased technologies that would (apparently) revolutionise living in the future. For a teenager, this was the stuff of dreams. The futuristic end to the opening (watch it here) showed cities with flying cars and infinitely high skyscrapers. How many of these ideas materialised? As Peter Thiel, founder of eBay, famously quipped about the technological inventions since the year 2000: ‘We wanted flying cars, instead we got 140 characters’.

There is little doubt that technological improvements causes higher productivity (making more stuff with fewer inputs) which in turn underpins economic growth. Economists like to think about two types of productivity: labour productivity is about making workers more productive through adding physical or human capital, usually measured as the amount of goods and services produced with one hour of labour. Total factor productivity, or TFP, is the increase in productivity that are not accounted for by increases in labour or capital, i.e. technological improvements. Another way to think of it is what I’ve called Nashuanomics: saving you time, saving you money. Any technological innovation that does these two things, improves productivity, increases growth, causing greater prosperity.

Economists measure the improvements in technology through TFP. One would expect that periods of rapid technological progress, like during the Industrial Revolution or the discovery of electricity, would cause large increases in TFP growth. But this is the conundrum: As Paul David has argued in several papers, there is not necessarily a clear link between new inventions of what he calls ‘general purpose technologies’ and our measures of total factor productivity. This is for the obvious reason that it takes time for new technologies to permeate society. Electricity, for example, took more than two decades before only half of all US factories had access to it. David finds similar results for the dynamo. While computers (and the internet) spread rapidly to households across the developed world, it had delayed effects on standard measures of total factor productivity. Which gave rise to Robert Solow’s quip: “We see computers everywhere but in the productivity statistics”.

Others counter by saying that we measure TFP inaccurately, that we cannot account for improvements in quality or utility. So a more intuitive question, perhaps, is to ask how the technologies of the last decade has allowed us to save time and money? The largest technological breakthroughs of the last decade that have affected our lives are arguably smart phones and tablets, and social media. Smart phones now offer access to email everywhere and a level of communication and interaction that was not possible before. Not only have access spread, costs have come down too. But how large have these gains been? Facebook and Twitter boosts networking and communication. But by how much? There are certainly large savings that accrue from using a typewriter to using Microsoft Word, but are we saving anything by shifting from Word 2007 to Word 2010 to Word 2013? And Angry Birds? A 2011 study reported that the world plays 5 million hours of Angry Birds per day.

Perhaps the software advancements over the last few years allow us to be more productive, but that that productivity allow for more leisure. As a student in my class recently remarked: Economists can now run regressions much faster than we could in the 1990s, but that just gives us more time to play around on Facebook. Is this evidence of a backward bending labour supply curve?

Of course, if we really want to see the new technologies in the productivity statistics, these technologies must infiltrate most of society. There are not many economists that run regressions in South Africa, which means that the savings from developments in Stata will be limited to a lucky(?) few. Technological improvements in mobile technology, instead, may have a far more dramatic impact. There are now 6 mobile phones for every 5 people in South Africa, which means that everyone has access to this time and cost-saving technology. (Even though mobiles reduce the costs of communication, I suspect the poor spend a larger part of their budget on phones than in the past, substituting lower utility leisure. This is just a conjecture though.) How can the poorest of the poor save time and money? Women in rural areas spend several hours a day collecting water. A simple technology – a tap – may save countless hours of labour. (Here one must tread carefully: women also use these hours away from the home to interact socially with other women. A tap in the home may save hours of hard work, but also isolate women and reduce their power within the household.) By asking the simple question – ‘What goods and services could we provide that will save the most time and money? – Nashuanomics is a great shorthand for government officials to think about the public provision of infrastructure.

And, finally, there is the constant fear that we’ve reached the end of new technologies. I’ve written about this before. As long as Nashuanomics exists though – as long as there are still savings in time and money possible – we haven’t seen the end of technological improvements. Predicting these new technologies is probably a futile exercise. One possibility is that they will be in those areas where the largest savings in time and money is possible. According to Andrew Kerr of UCT, a black commuter in South Africa spends on average 96 minutes of his day commuting. White South Africans spend 60 minutes. (This compares to 37 minutes in the EU and 49 in Europe). A better designed transport network or new technologies (trains or self-drive cars, which allows one to work will driving) would result in massive productivity (and utility, because who likes sitting in traffic?) gains in South Africa.

Flying cars are probably unrealistic. But spreading existing technologies to a greater proportion of the South African population could make a telling contribution to higher productivity, incomes, and quality of life.

Written by Johan Fourie

March 8, 2013 at 10:31

Fire, don’t hire

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What should strike any visitor to Switzerland, as I realised on a recent trip, is the extremely high capital-labour ratio of the country. Road sweepers don’t use brooms (as they do in South Africa), they use sweeper cars (think of golf carts on steroids), allowing those workers to be far more productive and, consequently, the government to employ fewer of them. This is true throughout the economy: there are fewer service staff in shops; fewer waiters in restaurants; fewer workers in factories. (But, importantly, more shops, restaurants and factories because these firms are competitive.)

Contrast this with the focus in South Africa on employment. Everyone from politicians and academics, to journalists and even trade unionists emphasise the need to create more jobs. But while job creation is an obvious necessity given South Africa’s highly unequal income distribution, the irony is that it is not achieved through focusing on job creation. No. Development is about producing more stuff with the same number of inputs, or using fewer inputs to produce the same amount of output (stuff). In short: it’s about improving productivity. And labour (i.e. jobs) is an input into producing the various outputs of the country: food on farms, clothing in small factory ships, vehicles in large assembly plants, and services in the financial, tourism or construction industries. So, in truth, if we want to develop, we need to focus on producing more stuff with fewer people, and should spend less time on thinking of creative ways to increase our inputs.

Instead of focusing on jobs, we should be focusing on adding more capital to people. Giving workers skills (human capital) adds to their ability to produce more with less. That is where an adequate education system is crucial, an issue which has received a lot of attention in South Africa. My take is that the particularly poor supply of education is only half the story. Perhaps South Africans don’t want a good education, because there is little need for it. Why would you want to learn anything if you believe that the best you can become is an unskilled labourer on a mine? Or maybe education is not even that important. (I can see Nic Spaull choking in his morning coffee.) Huge investments in education in several African countries after independence did little to accelerate economic growth.

When labour is scarce, it not only increases the price paid for labour, but also the incentive to innovate. This is something even Adam Smith noted when he said that no slave society has ever invented anything, simply because there was no need to: slaves were always available to do the job. But invention is the key to making a sustained improvement in productivity levels (i.e. to continuously do more with less): the Geneva road sweeper could never be so productive without the improvements in road sweeper technology that has eventually created the sweeper car. If South African firms are so focused on employing more people, there will be little incentive to innovate (both in technology and processes) which will allow the workers that already work there to be more productive. Our firms will not be competitive if they simply hire more workers when production increases.

So what about the 40% unemployed? Firstly, shedding jobs in one industry will make that industry more productive, which will also make it more competitive in international markets. This will allow the industry to grow, and more workers will be needed. But job shedding in one industry should also reduce the wage rate in other industries as those workers move. This would reduce wages in the rest of the economy, which will allow the rest of the economy to be more productive and competitive, creating a virtuous cycle. But, of course, wages don’t really fall where trade unions can collectively bargain against it. So, instead, some workers go unemployed, 40% of the South African labour force, to be exact.

Development is about making people better off. This is done by producing more stuff per worker than before. But if all of society’s focus is on creating jobs, rather than improving productivity, we will see this ratio of stuff per worker declining, which will only harm South Africa’s competitiveness and long-run development potential. If we’d like to be as rich as Switzerland, we should shift our focus from employing more people, to making those that are employed more productive.

Written by Johan Fourie

September 14, 2012 at 00:03