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Finance

Want better forecasts? Start with better management

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Good management has obvious internal benefits, such as high levels of productivity and employee retention. But proper management also has macro implications that enhance a company’s ability to anticipate broader economic trends.

In a working paper for the National Bureau of Economic Research, John Van Reenen, a digital fellow at the MIT Initiative on the Digital Economy, shows that well-managed firms make better forecasts — and the traits of those well-managed companies might come as a surprise.

Van Reenen, a professor at the London School of Economics, and co-authors created and designed an anonymous, self-reported Management and Expectations Survey of 8,000 British firms to track data on productivity in manufacturing and services. They worked with the UK Census Bureau to implement the survey.

The survey measured three key aspects of firms’ management:

  • How well they monitor operations and use this information for ongoing improvement.
  • Whether their targets are stretching, tracked, realistic, and appropriately reviewed.
  • Whether they: use incentives such as promoting employees based on performance; manage underperformance; make careful hiring decisions; and provide adequate opportunities for employee engagement.

The researchers found that well-managed firms make more accurate sales forecasts, no matter what their size or age. The findings further determined that management savvy doesn’t just result in better internal, or micro, business decisions. Top firms also accurately forecast macroeconomic outcomes such as gross domestic product, which boosts their ability to make wise choices about future hiring, investments, and materials.

The traits of well-managed companies

In assessing the management practices of the firms they studied, Van Reenen and his team discovered that:

  • Management practices vary substantially across firms. The lowest 10th percentile of firms lack robust monitoring or feedback processes and have limited performance incentives or employee training. Meanwhile, the 90th percentile are as well-managed as any leading international firm.
  • Management practices are strongly associated with superior firm performance. Better managed firms have: higher productivity, higher profitability, size, innovation, and a higher likelihood that they export their goods and services, which is a sign of fiscal health.
  • Management scores are higher in non-British multinational firms and those with more educated employees, and much lower in family-owned businesses, especially those that are run by family members.
  • Better managed firms are able to make much more accurate forecasts, both about macro GDP growth and their own micro sales growth.
  • Firms with high management scores know that they’re savvy. These companies are aware that their micro and macro forecasts are more accurate. They have lower subjective uncertainty in their predictions, which likely enables them to make better business decisions and quickly optimize operational and strategic actions with confidence.

Why good management matters

Poorly managed firms are bad at making predictions both about themselves and about the economy as a whole. But Van Reenen was surprised that well-managed companies “were much more accurate, not just about themselves, over how much they would grow, but also how accurate about how much the economy as a whole was going to grow,” he said.

Macro knowledge is invaluable: With this information, firms can lay the groundwork for future success by predicting demand, how many people to hire, or what their investments should be, perpetuating a cycle of success.

“I wasn’t expecting that, but the finding emerged from the research,” he said.

Cautionary tales of bad management

Fans of “Succession” should take note. Family-run businesses fared poorly in the survey, perhaps due to lack of proper oversight or nepotism.

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“Especially if your eldest son is in charge: You put in your eldest son or your eldest grandson, that’s a disaster,” Van Reenen said. “Think about why democracies work better than monarchies.”

Some management practices shocked him outright. (He won’t name names.) Yet these mismanaged companies can sputter endlessly along.

“Firms are just not bothering to collect data on anything and ignoring merit when they promote. For economists, it’s extraordinary how these firms exist. In our standard models of economics, they shouldn’t exist; competition is going to destroy them immediately. But they do,” he said.

How to get better at forecasting

Can management practices change? Possibly, if leaders are willing to restaff their executive ranks and rethink their practices. Change is often driven by pressure from major customers or a big negative shock. They then need to “shape up or die,” Van Reenen said. Corporate takeovers can have the same effect.

One COVID-19 silver lining? The time is ripe for change. “Especially now, so much is uncertain. If you can improve some of your management techniques, it will help you get a better grip on what’s going to happen in the future,” he said.

“Making the investment — which is often costly — in terms of trying to improve some of your structured management practices can have a transformative approach to improving your ability to control the future in these very uncertain times.”

Van Reenen plans to conduct similar studies in other countries, including the United States. He believes the findings will apply across regions. Especially in the U. S., well-managed companies can reap strong benefits of good management. They can grow and flourish faster than in Mexico or other parts of Europe due to fewer regulations and restrictions, and a more flexible marketplace, he said.

“If you think about relatively well-run companies, successful companies like Google, Amazon, or Microsoft, this is the kind of thing they do all the time. They’re constantly trying to scan the horizon and have planning teams to try and predict what’s going to happen in their markets in the future in order to make decisions,” he said.

For any company, he said, “It’s about scanning the future and planning for contingencies as a way of making better decisions now, which is going to set your success in the future much more clearly.”

Van Reenen’s co-researchers are Nicholas Bloom, Takafumi Kawakubo, Charlotte Meng, Paul Mizen, Rebecca Riley, and Tatsuro Senga.

Download the research

For more info Tracy Mayor Senior Associate Director, Editorial (617) 253-0065