January 27, 2014

|Bill Conerly

Now we have science saying it: management consultants add value. A formal study, sponsored by the World Bank and using a control group of factories as well as a treatment group, quantified the results. First year economic benefits exceeded the cost of the consulting—with later years’ benefits pure gravy. (Summary in Slate, details from Nick Bloom, hat tip to Tyler Cowen.)

The project examined textile factories in India, and I was initially somewhat skeptical that the results would apply here in the United States. After reading the details, I think that American managers can learn a lot from the study. The research team began with a list of 38 good management practices (found hereon p. 40). Although they are given as specific to the textile industry, it’s easy to re-state them in terms of your own operations. For instance, “Scientific methods are used to define inventory norms for yarn” could be applied for any input material.

I strongly advise operations managers to review that list and self-evaluate. Some standards are met in virtually every factory I visit (such as “The shop floor is clear of waste and obstacles.”) Others not so much: “Customers are segmented for order prioritization.” Customers do NOT have to be served in the order in which they asked for your goods or services. First-come-first-served makes sense in some cases, but not in others. Have a reason for your prioritization system that reflects the different value of different customers, as well as operational efficiency.

The list of 38 management practices misses two areas where I see lots of opportunities: sales and pricing. Too few companies have systematic procedures to call on prospects and past customers.  Too few use sales coaches to help their representatives perform better. On the pricing side, too few companies use marginal cost pricing. Instead, they either have nothing or they use an average cost estimate that fully loads in overhead. Using the wrong numbers is often worse than no number at all!

So you are running a company or a division and you wonder where you have room for improvement. First, bring in a consultant with a broad background to help you identify areas of focus. (That’s something I am good at.) Next, bring in expertise to focus on the areas most ripe for improvement. That might be your first consultant or it might be a specialist, say in sales training or cost accounting. Third, evaluate those results. Fourth, hit the next opportunity for improvement. Along the way, pat yourself on the back for taking your company to higher levels of profitability.