The Impact of Management Practices on Business Outcomes

The Impact of Management Practices on Business Outcomes 
New Research Shows Direct Correlation with M&As and Financial Performance 

It’s no secret – good management is good business, plain and simple. But is it possible to actually quantify the impact on business outcomes, such as mergers and acquisitions and financial performance? According to research conducted by the Harvard Business Review, we can. 

In an effort to determine whether there is a direct correlation between management practices and certain business outcomes, researchers used data from the US Census Bureau to examine the practices of 35,000 manufacturing plants. And while it is well established that much of management may be subjective, including leadership styles and how they align (or don’t) with various team members, objectivity can be found with the right questions. 

Quantifying Management Practices 

According to the article discussing the research, studies were conducted using more unbiased, neutral questions, leading to more definitive, measurable answers. For example, questions such as how much managers tracked employee performance, if they used the data found to improve practices, how production goals were set, and if they utilized standardized incentives are a few variations. Other questions included: 

• How many key performance indicators (KPIs) were monitored at this establishment? 
• What best describes the timeframe of production targets at this establishment? 
• What were non-managers’ performance bonuses usually based on? 

Answer choices provided were specific and assigned a value. As noted in the article, “For example, responses to the question ‘What best describes what happened at this establishment when a problem in the production process arose?’ were: i) No action was taken, ii) We fixed it but did not take further action, iii) We fixed it and took action to make sure that it did not happen again, and iv) We fixed it and took action to make sure that it did not happen again, and had a continuous improvement process to anticipate problems like these in advance.” The results were gathered and quantified to define more structured management practices as those that were more specific, formal, and frequent. 

Impact on Mergers & Acquisitions 

Researchers then tracked mergers and acquisitions among the companies included in the management practices study with additional data from the U.S. Census Bureau. The intent of this comparison was to quantify the extent to which management practices influenced outcomes in mergers and acquisitions and overall financial performance. 

The findings included the following:  

• Companies with more structured management, operations, practices, and procedures are more likely to become acquirers in an M&A. 
  • Companies even one deviation higher in management score were 7.5% more likely to become acquirers. 
• Companies with less structured management and fewer standardized policies and procedures are more likely to be targets. 
  • A mere one deviation point lower in management score resulted in companies being 2.8% more likely to become targets. 
• There is a strong spillover effect post-acquisition. A target company is more likely to adopt more structured management practices, similar to the acquirer company. 
  • The management scores of target companies increased by an average of 26% post-acquisition, including additional KPI monitoring, goal setting, and incentives. 
• There is a direct correlation between improved management performance and productivity. “[F]or plants whose management scores increased by one standard deviation following their acquisition, productivity increased by an additional 3.3%, while value added per employee, value added per worker-hour, and profit margins increased by an additional 3.13%, 4.19%, and 1.16% respectively.”  

Ultimately, the last point is what we should all take out of this research. It’s about much more than the effect management practices have on mergers and acquisitions. Rather, it exemplifies the importance of structure in management practices that affect the day-to-day operations and productivity of a company. Simply, it adds value, which will inevitably improve business outcomes – whether its M&As, increased profitability, or looking more attractive to investors who understand that implementing stronger management practices now is an effective strategy for long-term success later.  

Barker Associates has extensive experience in both specific CFO needs and more general management practice ones. If you need assistance, or have any other questions, please click here to schedule a 30-minute consultation at a rate of $100.