Investment in management practice is key to recovery

 

ANALYSIS: Improving standards of management, especially in SMEs, is the best way to boost productivity

IT IS common practice to view the Irish economic boom as a game of two halves: the first driven by exports and productivity growth, the second a property bubble fuelled by cheap money. While immediate attention to the budget deficit is essential, the real challenge for our future prosperity is to find some way of improving our productivity performance.

Economists have been addressing this question in a structured way for over 50 years. Ever since Nobel Prize winner Robert Solow established that the growth in inputs could not explain US output growth, the search has been on to explain the residual that has come to be known as total factor productivity.

Recent studies by economists at the London School of Economics and Stanford find a remarkably strong relationship between the standard of management in a country and productivity. Globally, the research indicates that when the standard of management is rated on a scale of one to five, a one-point increase in management standard is associated with an increase in industrial output equivalent to a 25 per cent increase in labour, or a 65 per cent increase in capital.

The management practice index amalgamates practice in relation to operations, the recruitment, development and incentivisation of people, and the cascading of targets and goals throughout the organisation.

Large differences in the index exist across countries, with the US and Germany significantly outperforming the UK. The standard of management in Ireland is about the same as that in Britain. Given that multinational corporations exhibit superior management performance across all countries in the study, it is likely that Irish indigenous firms have management practice scores significantly below their British counterparts.

A consistent finding in the study is that larger firms have better index scores than small ones. This can be explained by the investment undertaken by larger firms in developing management practices. In the annual survey of executive development undertaken by the Financial Times, expenditure on such activity is heavily concentrated in very large firms.

A number of studies have found a particular reluctance for small firms to engage in any level of management development. Given that Ireland has one of the largest shares of small firms – those employing 100 or less – among EU countries, this means that we are particularly vulnerable to underinvestment and thus a poor standard of management in indigenous enterprise.

In the current precarious economic environment, many businesses are in survival mode. Cutting failure rates in Irish SMEs is critical, given that they account for approximately 73 per cent of the employed. As a small open economy in a currency union, there are few policy instruments at our disposal. Investment in raising the standard of management in SMEs is such an instrument, one that will go directly to addressing the main imperative for future wealth creation.

If we accept that national competitiveness depends on improvements in productivity, then the model by which we deliver management training has to change fundamentally. To date, public expenditure on management development has been scattered across agencies and suppliers. This diluted approach has resulted in the poor aggregate performance of Irish management.

The National Training Fund (NTF) is resourced through a levy of 0.75 per cent on employers’ PRSI. In 2007 €400 million was raised by this fund, with expenditure divided equally between services to the employed and unemployed. Disturbingly, less than 10 per cent was directed to improving the standard of management. Of even more concern is the fact that none of the money was devoted to creating or sustaining an institutional capacity at national level for delivering improvements in the standard of management.

A number of supply-side factors were critical to our emergence from the doldrums of the 1980s. For one, our baby boom came much later than in our trading partners in Europe and North America. Along with this, increased investment in third-level education, genuine innovation championed by DCU and UL, and the creation of graduate-conversion programmes made Ireland a very attractive location for foreign direct investment.

Twenty years on our population bulge lies in the 25-44 age group, which comprises 32 per cent of our population, compared to 27 per cent for developed countries in general. This is the group that will bear the brunt of correcting our budgetary position while simultaneously providing leadership in organisations in the commercial or public sectors.

We must invest now in the capacity of this group to manage and develop organisations. More importantly, we must demonstrate the capacity for institutional innovation that served us so well in the past. The difference now is that the institution must be geared to the needs of those both in employment and seeking work.

If the broad base of Irish business is to derive sustainable benefit from investment in people at work, we must be ambitious in scale and approach. I believe that as a small economy we have the opportunity to do this, and do so quickly.

One solution would be the adoption of consortium approach, whereby groups of small and medium enterprises enter into a performance-based contract with, say, Enterprise Ireland. In turn they could work in partnership with the organisation that I lead, the Irish Management Institute, which could function as a national portal for the delivery of a full range of management development interventions, engaging the required expertise wherever it may reside, here in Ireland or overseas, in academia or in business. This model would focus everyone on their core mission, and maximise use of the resources that we have. Co-operation is the key.

Simply “engaging in training” is no longer an acceptable metric for dispersal of public funds. To really drive productivity, export growth and employment, strategic objectives, reporting structures and also perhaps grants and other enterprise development funding must be tied to participation in such high-performance groups of companies.

This would bring scale, discipline, accountability and expectation into the model and maximise the return on investment in our workforce. A public policy response is now imperative.

Tom McCarthy is chief executive of the Irish Management Institute