BRITISH POLITICIANS enjoy lecturing their continental European counterparts on the virtues of a deregulated and flexible economy. But on the subject of what the flexible economy is supposed to deliver, namely superior company performance and productivity, they fall strangely silent. This is because, measured by output per hour, the UK still lags rather than leading. Recent figures show that in 2004 American workers added 34 per cent more value per hour than their UK counterparts, Germans 11 per cent more, and the French 25 per cent more.

This frustrates and perplexes ministers and their advisers, who have spent the last 30 years using the UK as a testbed for a no-alternative economic experiment in the abovementioned flexibility and deregulation, only to find that while the macroeconomic levers they can pull do affect productivity, it’s the microeconomic processes inside companies that they can’t reach (at least not directly) that matter more. It’s not the economy: it’s management, stupid.

Reinforcement for this view comes from a new report from the LSE’s Centre for Economic Performance, McKinsey & Co and Stanford University entitled Management Practice and Productivity: Why They Matter , which supports the common-sense notion that the way firms are managed is one of the most important ways of distinguishing between them. Scoring 4,000 medium-sized European, Asian and US manufacturing companies on the quality of their operations, performance and talent management, the report suggests that, as with productivity, the UK is in the second league for management, behind the top tier of the US, Sweden, Japan and Germany, alongside France, Italy and Poland, and ahead of the dunces of Greece, India and China.

However, these figures conceal some interesting subtexts. The difference in national averages is largely accounted for by the ‘tail’ of badly run firms – on the chosen criteria, 8 per cent of UK companies fall into this category compared with 2 per cent in the US. In India, 20 per cent of companies are badly run, yet the best Indian firms are a match for anyone. Multinationals operating in India, for example, are among the best-managed anywhere, with the top 30 per cent of Indian firms being better managed than the average in the UK. As the researchers note, combined with low labour costs, this makes them formidable competitors, irrespective of national averages.

Ownership matters too. Multinationals, particularly US ones, are the best managed everywhere. Interestingly, private-equity-owned firms aren’t notably better managed than the UK average, and are less well managed than the top tier of national leaders, multinationals and firms under dispersed shareholder ownership. So much for the supposed performance advantages conferred by their governance arrangements.

The researchers argue that the study is good news for companies, ‘suggesting that they have access to dramatic improvements in performance simply by adopting good practices used elsewhere’. For policymakers, the challenge is harder – getting the good-practice message across to the poor-performing tail that brings the average down.

But not so fast. In a kind of infinite regression, complementary research in progress under the aegis of the Advanced Institute of Management Research (AIM) hints that ‘adopting good practices used elsewhere’ is anything but simple. That is because managers are astonishingly bad at assessing their own performance. More than 85 per cent of managers in the LSE study believed their company was better managed than the average, and self-assessed scores ‘have almost no link’ with firm performance or the marks awarded by the researchers.

More broadly, the AIM research identifies the context for good practice as critical. Indirect support for that comes from the LSE finding that although there are relative differences in national scores (the UK scores well for people management and less well for operations, for example), ‘no single dimension provides the key for improved management performance’ – good firms are well managed across all performance aspects. The implication is that a firm can’t just import an attractive practice: it has to have the underpinnings in place to support it – including the awareness that it is needed in the first place.

So when it is said that British managers are notoriously reluctant to adopt promising practices, this is true but not very helpful, tantamount to saying that the UK is not very good at management. To break out of the circle of inertia, the key seems to be to get managers looking both outward – as much to customers as to other companies, to get an accurate bearing on their real competitive position and inward – to develop their own ‘signature’ practices, based on their own values and history, that will distinguish them from others in the eyes of customers. As with fruit and veg, home-grown is best.

The Observer, 22 July 2007