Management Consultants Might Be the Best Foreign Aid

(Bloomberg Opinion) -- How do poor countries become rich, industrialized ones? Importing foreign know-how often is the key. Although every country invents its own unique technologies and practices, in the early stages of development most of the big, rapid gains can be had by simply adopting the insights that richer countries have already learned. A lot of that foreign know-how is technological -- modern sewing machines, steel mills, electronics blueprints and the like. But a lot involves the more prosaic techniques of how to manage a company..Business managers in economic models are assumed to be rote, efficient creatures, focused on maximizing profits and minimizing costs. In the real world, though, the number of tough decisions managers have to make on a daily basis is dizzying -- whom to hire and fire, where to open and close facilities, how to organize chains of responsibility and authority, how to compensate employees, how to improve product quality, where to source inputs, whether to contract out or perform functions in-house and so on. Perhaps most important are choices about what to sell, where to sell it, how much to charge for it and how to make it. These decisions form a production chain of sorts -- mistakes in any one of these areas can lead to serious inefficiencies that gum up the entire machine..Good management is thus best thought of as another kind of technology -- and a crucial one for developing countries without much experience. Transferring the management techniques of rich countries to poor countries could yield big benefits for global development..Economists have found that this actually isn't that hard to do. In 2011, a team of researchers offered free management consulting to textile manufacturers in the Indian city of Maharashtra. In order to ensure that the experiment was random, they picked companies that owned several different plants, and offered the consulting to only some of the plants, employing the services of a large U.S.-based management firm. For several months, the firm gave advice on a range of business processes, including factory operations, quality control, inventory management, sales and human resources.Although it took some time for the Indian managers to heed the consultants’ advice, they eventually did, with impressive results. The plants that received professional advice increased their output, reduced quality defects and maintained a leaner inventory. All told, their productivity rose 11%, and their profits went up a lot -- by $230,000 a year..Even more impressive was how the good management practices persisted and spread. Eight years after the initial experiment, the economists returned to India to see whether the good practices had been forgotten over time. They found that some of the improved management practices the consultancy had taught had been dropped, largely due to the departure or reassignment of the managers who received the advice. But many of the practices had been endured, and many had spread to other plants within the same company. And despite the adoption of good practices, plants that had received the advice directly eight years earlier still retained a significant productivity advantage..This experiment is impressive, but it’s not the only one of its kind. Another team of economists gave a year of management advice to a large number of small and medium-sized companies in Mexico in an array of industries, using local consulting firms. They found significant increases in productivity, profitability and company growth..More experiments like these need to be done, with a wider range of consultancies, business practices, countries and industries, before the power of consulting is treated as an established fact. But these studies provide important evidence, and yield several critical lessons. First, although the management-consulting industry is sometimes viewed with suspicion in rich countries, the industry is clearly valuable as a way to transfer knowledge to companies far from the frontier of good business practice. Second, managers in developing countries are hardly the idealized profit-maximizing machines depicted in economic models, and could use a lot of help and advice. And third, as the experiment in Mexico and the spread of good practices between plants in India shows, much important expertise is already available within developing countries, and simply needs to be more widely disseminated..These experiments also suggest policies that both developed and developing countries can use to boost global growth and poverty reduction. For rich nations that want to help poor countries grow, offering management-consulting services may be a more effective form of foreign aid than some of the practices now in use. Developing countries, meanwhile, can focus on dispersing the management knowledge contained within their most productive companies, by encouraging employees to move around between employers. And they can also require that investors from more advanced nations set up joint ventures with the locals, helping them learn foreign management techniques. If managers in poor countries can figure out how to do things the way managers in rich countries do, global development will get a major boost..To contact the editor responsible for this story: James Greiff at jgreiff@bloomberg.net.This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners..Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion..©2019 Bloomberg L.P.

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Management Consultants Might Be the Best Foreign Aid

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