Monday, November 15, 2010

Management consulting: a randomized controlled trial

Management consultants don’t have the most stellar reputation for offering value for money – although, truth be told, the infamy of investment bankers has long since left them in the shade – so I was impressed when, early this year, rumours reached me of a fascinating new study in which a consulting firm was implicitly agreeing to subject its advice to a randomised trial. ...

(A draft, “Does Management Matter? Evidence from India”, is available from the website of co-author Nick Bloom at Stanford.) ...

The researchers hired Accenture to provide management consulting services to 14 factories in Mumbai, chosen at random from a group of 20. The other six factories served as a control group and received a diagnostic performance audit but little serious advice. ...

The results were undeniably impressive. The effect of a few months of consulting advice was that profits rose by almost a fifth, to the tune of several hundred thousand dollars a year. (The latest draft of the study puts the figure at $230,000; an earlier calculation reckoned it was even higher.) Output was up, inventory was tighter and defect rates were halved.

Accenture’s fees for the five-month consulting gig, at commercial rates, would have been roughly the same amount as the increase in profits – so the arrangement would have paid for itself by the end of the year. If any of the consulting advice stuck, this would have been a fantastic investment. The indications are that the advice more than sticks: the new procedures generate more information, more ideas for running a tight ship, and a spiral of continuous improvement. ...

The more substantial caveat is that textile companies in India have their own distinct problems: tools and machinery were left lying around, and stock control was frequently non-existent. ... Modern inventory-management techniques made a big difference in this particular sector of Mumbai’s economy, but that does not mean that Vodafone or Barclays or the civil service have as much to gain from bringing the consultants in.
--Tim Harford, Financial Times, on the case for pursuing your management consulting career in India. HT: Chris Blattman

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