When managers do not know that they do not know

Being a labor economist by training, thinking about the skills of jobseekers, workers in the changing world of labor and students is an integral part of my everyday work-life and part of my ongoing dialog with policy makers and academics.

But what about the skills of employers?

Do managers and CEOs have the skills needed to make firms grow and succeed in integrated global markets and complex business environments?  And, very importantly, do they have the skills to maximize the growth potential that could generate jobs?

We know that enhanced management practices lead to higher firm productivity and, potentially, more jobs. Current estimates suggest that about half of the variation in GDP per capita is explained by differences in inputs—labor and capital—and the other half by differences in total factor productivity (TFP).

While TFP has traditionally been a black box capturing everything that economists cannot measure, lately the profession has made progress in pulling back its black veil. Among other things, we are seeing investing in better management practices for firms (which require proficient management skills) leads to increases in TFP.

For example, a randomized controlled-trial study in the manufacturing sector revealed that the adoption of advanced management practices led to large increases in productivity: following a consulting intervention that cost around USD 250,000 per firm, profits in typical firms increased in the first year by USD 325,000.

Can this be applied to other country contexts?

Let’s look at Bosnia and Herzegovina, where a recent World Bank report showed that TFP growth in Bosnia and Herzegovina between 2009 and 2014 was close to null. While there is no measurement of management performance among firms in the country, indirect evidence suggests that the Bosnia and Herzegovina is lagging behind on this factor affecting competitiveness (among others). In the last World Economic Forum Global Competitiveness Report, the sub-indicators that pushed down the country’s ranking in competitiveness (rank 91) point to issues related to management practices - such as weaker attitudes towards entrepreneurial risk (rank 103), growth of innovative companies (rank 128), and adoption of disruptive ideas (rank 112).

One of the reasons firms do not adopt advanced management practices, according to some academics and practitioners, is that managers do not know what they do not know.  This is often referred as ‘the perception problem.’ Simply said, managers do not know or do not acknowledge (even to themselves) that they could be better managers and adopt better management practices. After all, why would anyone try to fix something that seems to be working?

Different things can be done to help managers understand they can do better. At the grassroots level, evidence that adopting advanced management practices will lead to firm growth, and even job creation depending on the bottle necks and sectors, can be instrumental in changing mindsets.

In an effort to overcome these challenges, the World Bank, in cooperation with Swedish International Development Cooperation Agency, is sponsoring a project to encourage business development, entitled Business Management Advisory Support. This labor demand intervention complements a similar one introduced in a previous blog. The pilot intervention aims to provide tailor-made business advisory support to a select number of small and medium-sized enterprises free of charge. Implementation support is being provided by the consulting firm Deloitte. Through these services, managers are expected to see the initial gains of taking risks and adopting new managerial practices. More than 40 firms have already shown interest in these services. 

[Firms interested in being part of this pilot intervention have until January 31^st 2019 to apply here] 

But governments will also have a role to play. Sharing information about advanced management practices that work, new markets that could be profitable for firms, and overall investment in managerial skills are all things that governments can do in collaboration with the private sector to overcome the perception problem and improve productivity. Policies like these should complement those that we often hear and refer to improving the business environment, such as removing credit constraints, simplifying procedures, eliminating corruption and so on.

In sum, if we want to have firms that maximize opportunities, we need to support the management skills of those who make decisions at the firm level. Better managerial practices will lead to firm growth and a wealthier country.

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