Management matters in Northern Ireland and Republic of Ireland

Published: March 2009

Executive Summary

Detailed investigative research into the management practices currently in use in the Republic of  Ireland (ROI) and Northern Ireland (NI) was commissioned by the Department of Enterprise Trade and Investment, InvestNI, the Department for Employment and Learning, Intertrade Ireland, Forfás and the Management Development Council. The objectives of the research were to: compare the levels of managerial skills with those in Great Britain and other countries; identify areas of weakness in the management practices of manufacturing firms; identify the factors that may account for the differences; indicate where targeted improvements could improve performance and investigate whether similar issues also apply in tradable services firms.

McKinsey & Company was engaged to undertake this work because it has spent seven years, together with the Centre for Economic Performance at the London School of Economics, applying a robust approach to assess management practices and showing how these practices were connected to business performance.

Across the globe, the research has found that firms that are good at deploying accepted best-practice management techniques perform significantly better, in economic terms, than those that are not. This suggests that improving management practices may be a highly effective way for a firm to ensure it outshines its peers.

The potential impact on national economies of improving management practices is large. Globally, the research indicates that when management practices are rated on a scale from 1 to 5, a 1 point increase in management practices is associated with an increase in industrial output equivalent to that produced by a 25% increase in labour or a 65% increase in capital.

In this study researchers carried out structured interviews on management practices with plant managers in over 150 manufacturing firms in ROI and over 120 in NI, representing 40% of eligible firms in ROI and over 70% in NI. The firms sampled were representative of the manufacturing base in terms of size, ownership and sector. The research focussed on firms with more than 50 employees, as these firms account for more than 92% of the Gross Value Added (GVA) in ROI [1] and 75% of the GVA in NI [2].

The survey results were compared with those from similar interviews with over 5,000 manufacturing firms in 14 other countries in Europe, Asia and the Americas. Similar research was also piloted in service industries, based on interviews with a small number of managers in over 50 Irish firms in the tradable services sector [3]. For the methodology used and dimensions assessed, please see the Appendix.

ROI and NI show significant potential for improvement

Looking at the average management practice scores of all the companies surveyed in each country, the analysis highlights a significant gap between the scores in both ROI and NI and those in the countries with the best management practices. Both ROI and NI lie below the global average and below Great Britain in the ranking of countries, while the US is at the top.

The performance of high value manufacturing firms in ROI is much better, ranking ahead of Great Britain, and just behind the top performing tier of countries. Results from the pilot survey in the tradable services sector suggest that management practices are generally better in services than in manufacturing, and more in line with practices in high value manufacturing firms. Further detail on the tradable services pilot findings can be found in the appendix.

The breadth and depth of the study allowed for the examination of the factors associated with differing levels of capability and delivery in management practices and provided valuable insights into the reasons why there are such wide variances internationally.

Structural factors explain part of the lag in the management practice ratings

The research identified seven structural factors that appear to account for a significant part of the variation in management practice scores between countries, including the gap between Ireland and other countries:

• Firm size: Globally, larger firms are found to have better management practices than smaller firms, and this holds true in ROI and NI as well. The manufacturing base in ROI and NI includes a high proportion of smaller firms, and this bias has a negative impact on both countries’ average scores.
• Ownership: The analysis indicates that management practices vary with ownership type and that firms owned by dispersed shareholders generally have the best management practices. ROI and NI have a high proportion of founder-owned and family-owned firms, which tend to have poorer management practices.
• Skill levels: The more educated its workforce, the better the management practices a firm deploys. In ROI and NI, relatively few managers and nonmanagers in manufacturing firms have degrees*, and this also accounts for part of the management practice gap.
• Sector: Management practices also vary significantly by sector, and high value manufacturing firms [4] in all countries surveyed have better management practices than the others. This difference is particularly marked in ROI, where there is a large gap between the performance of high value manufacturing firms and firms in the remaining sectors. This appears to be partly because high value firms in the Republic employ unusually large numbers of graduates, while other manufacturing firms in ROI have unusually low numbers of graduate employees.
• Labour flexibility: Firms in flexible labour markets tend to have better people management practices than firms in markets where labour rigidity rules. Labour flexibility in ROI and NI is relatively high, but not as high as in the US, and this also accounts for part of the gap.
• Presence of multinational enterprises (MNEs): Multinational enterprises, both domestic and foreign based, tend to have better practices than local firms in all countries surveyed. There is a higher proportion of MNEs among manufacturers in both ROI and NI than there is globally, and this helps to reduce the gap between the ROI and NI scores and those of higher ranking countries.
• Competition: Globally, the data illustrates that high levels of competition are associated with good management practices. This may explain why exporting firms in ROI and NI have better management practices than those serving only the domestic market.

In total, the combination of these structural factors can account for about 40% of the gap between ROI’s average score and that of the US at the top of the league table, and about 50% of the shortfall in NI’s score compared, again, with that of the US. The balance of the gap is explained by poorer performance in ROI and NI firms across a number of management practice areas.

There is scope to improve three areas of management practice in particular

After adjusting for the structural factors outlined above, the research was used to identify management practice dimensions where firms in ROI and NI are weakest. It transpired that many firms are poor at defining the balanced set of metrics necessary to align the shop floor with the corporate agenda. They are also relatively poor at reviewing performance against the metrics they do define, and when they identify poor performance they appear to be reluctant to take the actions necessary to address it.

ROI and NI both have a large proportion of firms with poor management practices

Globally, the analysis shows that the quality of management practices varies much more (between firms) within countries than between countries, and that it is typically a relatively high number of firms with poor management practices that drives down the average national score of a low ranking country.

Both ROI and NI have a large proportion of lowly rated firms, with 19% of firms in ROI and 12% of firms in NI scoring less than 2 on a management practice assessment scale from 1 to 5, compared with 7% in Great Britain and just 2% in the US.

Improving areas of weakness is more important than excelling in others

At the level of the individual firm, the analysis suggests that focusing on improving the worst areas of management practice – the weakest links in the chain – and achieving consistently good management practice scores across the board is probably the most effective way of achieving the higher overall scores that are associated with better business performance.

Successful companies, meaning those with the highest productivity, tend to have consistently high management practice scores with little variation across all the 18 dimensions measured.

Closing the management practice gap could deliver substantial economic benefits

How could ROI and NI improve their positionings in the league table of management practice One obvious approach would be to focus on those firms where the quality of management practices is currently below average also helping them improve their management practices. Bringing the firms rated below average in ROI and NI up to the average level in each country by increasing their average management practice scores by one third of a point, would propel both countries into the top tier in the global ranking, the potential benefits to the economy are significant. The research suggests that such an improvement in management practice could be associated with an increase in the sector’s GVA of £150m-£300m in NI and €500m-€2.5bn in ROI.

The takeaways

For companies in ROI and NI, this research is good news. Some companies in both jurisdictions have strong, effective, world class management practices in place and are already reaping the benefits in terms of higher productivity, better returns on capital and more robust growth. For those who are not yet at world class levels there is a significant prize to be had simply by adopting good management practices.

Improving management practices is a highly efficient way for firms to leverage their existing labour and capital. Yet surprisingly few firms have made any attempt to gain insight into the quality of their management behaviours. Those that do so give themselves an opportunity to access rapid, cost-effective and sustainable competitive advantage.

For policy makers, this research highlights some common issues in NI and ROI. There was an opportunity to collaborate with firms to significantly improve the economies of ROI and NI. The overall performance of most countries is determined not by the performance of its leading companies, but by the number of poorly performing companies. By developing environments that encourage and assist all firms to adopt good management practices, and by devoting as much attention to the followers as to the leaders, both governments can drive the competitiveness of their entire economies.

Notes

[1] Census of industrial production, Exhibit 12, 2005

[2] Small and Medium size enterprises in Northern Ireland, Table 2, 2006

[3] A tradable service can be sold in a different location to where it is produced. For the purpose of this work, tradable services firms are those with the Standard Industry Classification (SIC) codes: Computer & Related Activities (SIC 72), Research & Development (SIC 73), Market Research (SIC 74.13), Business & Management Consultancy (SIC 74.14), Architectural & Engineering (SIC 74.2), Technical Testing & Analysis (SIC 74.3), Advertising (SIC 74.4) and Creative Entertainment (SIC 92.1-92.3)

* Degrees used as a proxy for skills levels

[4] High value manufacturing, as defined by the OECD, include: Mechanical Engineering (SIC 29), Pharmaceuticals. (SIC 24.4), Other Chemicals (SIC 24.6), Electrical & Optical (SIC 30-33) and Transport Engineering (SIC 34-45)