Intensive management consulting can have lasting positive effects on firms’ management practices and productivity.
Management consultancy services from an international consulting firm are offered to large textile firms to help them to identify areas of improvement and implement standard management practices.
- To introduce a set of standard management practices
- To improve firm productivity
This intervention was tested in a country where large manufacturing firms are typically poorly managed and rarely have standard business practices in place for activities such as systematically collecting and analysing data, having clear target objectives or linking pay and promotions to performance. This is a common situation in many emerging economies.
Large textile firms with 100 to 1,000 employees, excluding multinationals. They have an average of 270 employees, US$13 million in assets and sales of US$7.5 million a year. If compared to US manufacturing firms, these firms would be in the top 2 per cent by headcount and the top 5 per cent by sales. The firms are family owned and run, have been operating for around 20 years and score low in management practices.
- Initial diagnostic: For a month, a consulting firm evaluates the current management practices and makes recommendations for change. The evaluation focuses on 38 standard business practices encompassing a range of basic manufacturing principles that are standard in almost all US, European and Japanese firms. Those practices can be grouped into five areas: factory operations, quality control, inventory, human resources and sales.
- Implementation of recommendations: For a period of four months, a consultant works with the firm’s management to put recommended management practices into place and fine-tune them so that employees can readily carry them out.
Each phase involves about 15 days of consulting time per firm. The consulting services are provided by a large international management consultancy. The market value of the full package is around US$250,000 per firm.
- In the short run, the adoption of good management practices by firms that received support to implement the recommendations was more than twice that of firms that only received the initial diagnostic service.
- Firms that only received the diagnostic typically didn’t adopt the more complex practices like daily quality meetings, formalising monitoring processes or defining roles and responsibilities.
- In the short run, receiving support to implement the recommendations led to quality defects being cut by about a third, inventory being reduced by about a sixth and output increasing by an average of 9.4 per cent.
- These improvements led to an average increase of 16.6 per cent in productivity and raised annual profitability by about US$325,000.
- In the long run, although firms dropped some of the previously adopted new practices, the positive effects of the implementation support scheme persisted, with adoption in the supported firms being 20 percentage points higher.
- Seven years after the end of the intervention, firms that had received support to implement the recommendations were more likely to be exporting and to use more modern looms.
- Seven years after the end of the intervention, firms that had received support to implement the recommendations had a similar number of looms as those that only received the initial diagnosis but had cut the number of employees by a quarter, with a resulting productivity (looms/employee) increase of 26.7 per cent.
- Good management practices also spread to plants that were part of the same firm but had not received the intervention, resulting in long-term adoption levels similar to those of the plants that had received the intervention.
- Firms that received the full package were more likely to be using consultancy services seven years after the end of the intervention and to have implemented better management practices in areas not targeted by the programme, such as marketing.
- Intensive management consulting can have lasting effects on firms’ management practices and productivity.
- Small improvements in management triggered by a diagnostic may be less stable than large improvements introduced through intensive support to implement the recommendations.
- Spillovers within and across firms are important in improving management practices.