Are management consultants of any use?

Recently I read and enjoyed THE MYTH OF MANAGEMENT: Why the Experts Keep Getting it Wrong by Matthew Stewart (2009).

Stewart told two stories in alternating chapters.  One is a history of theories of management, which is the topic of my previous post.  The other is Stewart’s personal experience of BS jobs in management consulting.

In 1988, Stewart, at age 26, found himself with a philosophy doctorate from Oxford and no job,  On a whim, he sent his CV to some management consulting firms.  By chance, he got a job from a firm looking for “non-traditional” hires—that is, people without MBA degrees.

Matthew Stewart

He soon found himself going to distant countries and convincing executives twice his age that he understood their businesses better than they did.   His tools were a set of algorithms developed by his firm, and his ability to play the role of an expert.

The main algorithm, as described in his book, was a system for estimating the cumulative cost, revenue and profit for serving each of a business’s clients.

What the system almost always produced was a graph, which looked like a whale, that showed that 20 percent of a firm’s clients produced more than 100 percent of its profits, 70 percent added virtually nothing and 10 percent cost the firm money.

Of course the question is how to disentangle the high-value, little-value and negative-value clients.  If you follow the Pareto 80/20 rule, then 20 percent of a public library’s books can be expected to represent 80 percent of its circulation, and the remaining 80 percent of the books only 20 percent of the circulation.  But you wouldn’t want a library to dump 80 percent of its books.

Companies that stop making low added-value products, as Eastman Kodak did with cameras and Xerox did with small copiers in the 1980s, find that ceding these markets empowers potential competitors.

That’s not to say that the quantitative analyses done by Stewart and his colleagues were worthless.  Understanding numerical data is useful.  But nobody ever checked whether Stewart’s firm’s interpretation of the data was helpful or even correct.  The consultants never suffered any consequences for being wrong.

Stewart did risk analysis—he had no training in risk analysis—for a Mexican bank in the eve of the collapse of the Mexican peso and the Mexican banking crisis.  Neither he nor his client had any notion that the crisis would be upon them, and his firm walked away with millions of dollars in fees.

He quit his firm for a while, then was enticed to join with some breakaway employees to form a new firm.  He invested all of his savings in the new firm.  After a time some the partners started to squeeze out Stewart and other partners.  They stopped his pay without telling him and refused to let him withdraw his stake.

But he successfully sued, got what was owed him and sold his shares in the company at the height of the dot-com stock market bubble.  He then began his new career as an author.

His whole saga reads like a satirical novel.  Indeed, since he doesn’t mention the name of his firm, his clients or his co-workers, it could just as easily have been fleshed out and published in the form of a satirical novel.

The many pitfalls of management theory

As a newspaper reporter who covered business for 20 years, I learned that there are intellectual fashions in management theory as in everything else.

Once the key to success was thought to be vertical integration.  The idea was that a corporation should control every aspect of its business, from raw materials to distribution, in order to guarantee quality and eliminate the middleman.

Then the key was supposed to be diversification.  The idea was that a corporation should engage in varied lines of business so that a downturn in one line of business was offset by continued gains in others.

Then it was core competency.  The idea was that a corporation should limit itself to whatever it did best and enjoyed a competitive advantage, and outsource everything else.

The path of least resistance for any manager has been to follow the fashion of the day.  Failing by doing the same thing everybody else was doing has always been more acceptable than failing by doing something different.

I recently read a book, THE MANAGEMENT MYTH: Why the Experts Keep Getting It Wrong by Matthew Stewart (2009), that validity of these management theories ranges from highly uncertain to completely bogus.

I was surprised to learn that the ideas of Frederick W. Taylor, founder of scientific management, and Elton Mayo, discoverer of the so-called Hawthorne effect, were based on fake experiments.

F.W. Taylor

Frederick W. Taylor claimed that there was one best way to perform any physical task.  It was the job of the manager or industrial engineer to discover the best way and to micro-manage workers so that they followed it, mindlessly and repetitively.

He claimed to have taught a Bethlehem Steel worker he called “Schmidt” the most efficient way of loading pig iron onto a freight car, and made that a standard method for loading pig iron.

The reality was that, one day in 1899, he gathered a group of Hungarian immigrant workers and challenged them to load as many 92-pound ingots as they could in 14 minutes.  He then extrapolated this to a 10-hour work day, discounted the total by 40 percent.  The total was 47.5 tons.

He offered a wage incentive if they could do this all day.  This would have been quadruple their normal output.  They declined.

Taylor then recruited another group of workers and challenged them to meet the target.  The only one who could was a German immigrant named Henry Noll—the “Schmidt” in Taylor’s tale.  Bethlehem Steel did not adopt Taylor’s method, but it became famous anyhow.

Taylor’s system eliminated the need for skilled workers.  They were undesirable because they might have ideas of their own.  It was up to managers and industrial engineers, not the workers themselves, to determine how each job can best be done.

His method was the same as the Soviet Stakhanovite system: Take a strong and efficient worker, determine the most he can accomplish under ideal conditions and make that the target for every worker.  Lenin praised Taylorism.

Elton Mayo

Elton Mayo claimed that workers could be managed by offering them psychological and emotional rewards.

He claimed to have found by accident that workers at Western Electric’s Hawthorne plant became more efficient as a result of being the center of attention—the so-called Hawthorne effect.

The reality was that in 1924, an engineer named Henry Hilbert at Western Electric’s Hawthorne plant ran an experiment to determine whether increased illumination would increase worker efficiency.  The study was subsidized by the electric power industry.

He gathered seven women employees in a separate room and had them assemble telephone relays under different lighting conditions.  He also experimented with work breaks.  Efficiency seemed to increase no matter what he did.

Mayo learned of the results of the experiment and decided that the real Hawthorne effect was treating these women as though they were special and making them feel they were members of a team.

But Stewart pointed out that the factor he ignored was that the assemblers were given a group wage incentive to achieve greater efficiency.  Also, two members of the original team were fired for being shirkers and malcontents, and one of their replacements strongly wanted the higher wage and pushed her co-workers to do more.

Hilbert later repeated the experiment.  One group of workers were given the same special treatment, but no wage incentive.  Their efficiency did not improve.  Another were given a group wage incentive, but no special treatment.  They achieved the same efficiency gains as the original group.

So it was the pay, not the special treatment that mattered.  But the whole point of Mayo’s method was to avoid the need for increased pay.