Latest / The Productivity Podcast with Fexingo: Output, Efficiency, and Long-Term Economic Growth / The 17 Percent Productivity Boost from Management Consulting
Transcript
- Lucas: There's a famous productivity puzzle: why do some firms produce so much more than others, even in the same industry, using the same technology? A recent experiment in Mumbai's textile district gives us a remarkably clear answer. Luna: What did they do? Lucas: Back in 2013, a team of economists led by Nick Bloom and John Van Reenen ran a randomized controlled trial with 88 textile mills in Mumbai. They gave half of them free management consulting for a few months. Nothing fancy — just structured advice on quality control, inventory management, and production planning. Luna: And the result? Lucas: Productivity jumped by 17 percent on average. Some firms saw gains as high as 50 percent. And those improvements persisted even after the consultants left. The cost was about $20,000 per firm, but the annual productivity gain was worth over $100,000. Luna: That's a massive return. Why weren't they already doing those things? Lucas: That's the crucial question. Most of these mills were family-run, with informal processes. The owners were spending all day putting out fires — broken machines, rush orders, quality rejects. They didn't have the time or the framework to step back and systematize. The consultants basically gave them a mirror and a playbook. Luna: So the barrier isn't capital or technology, it's information and implementation. Lucas: Exactly. And that's a big insight for long-term growth. We obsess over innovation — new inventions — but a huge chunk of the productivity puzzle is just diffusion: getting existing best practices to the firms that don't use them yet. McKinsey estimated that if all firms adopted known best-practice management, global GDP could be 8 to 10 percent higher. Luna: That's trillions of dollars of economic output left on the table. And the fix isn't expensive — it's a few months of consulting. Lucas: Right. And this isn't just a developing-world story. Similar gaps exist in rich countries. There's a persistent productivity gap between 'frontier firms' — the top 5 percent — and the rest. Management quality explains a big chunk of that gap. Luna: So what specifically did the consultants do that made such a difference? Lucas: Three main things. First, quality control: they introduced simple defect tracking and feedback loops. Workers could see what was going wrong and fix it in real time. Second, inventory management: instead of piling raw materials randomly, they organized shelves and used a kanban-style system. Third, production scheduling: they laid out a clear sequence of jobs so machines weren't idle and workers weren't waiting. Luna: It sounds almost trivial when you lay it out like that. Lucas: It does. But that's the whole point. The practices aren't secret. They're just not obvious when you're in the middle of the chaos. The consultants acted as a catalyst — they forced a structured diagnostic and then a disciplined implementation. Luna: It reminds me of how many small, cumulative improvements compound into big gains over time. And that's actually a good segue to a quick aside. If you find these deep dives into productivity helpful, they only exist because listeners like you support the show. We keep it ad-free and independent, and that's possible thanks to contributions at buy me a coffee dot com slash fexingo. Lucas: Exactly. Every little bit helps us produce more episodes like this one. Speaking of little bits, the compounding effect of these management improvements is huge. Over time, that 17 percent gain doesn't just add value once — it compounds with reinvestment. Luna: And that's the link to long-term economic growth. From the perspective of a whole economy, if we could raise the management quality of all firms by even a modest amount, the cumulative effect on GDP would be enormous. Lucas: Yes. In fact, the study also found that the consulting led to a 50 percent increase in output with no increase in defects, and a 20 percent reduction in inventory. That's pure efficiency gain. Luna: But were there any downsides? Did the workers lose jobs? Lucas: Interesting question. The firms didn't lay off workers — they grew output instead. So employment actually rose. The productivity gain came from better processes, not sweating labor harder. Luna: So it's a win-win. Lucas: In that context, yes. But the broader picture is more complex. If every firm becomes more productive but demand doesn't keep pace, some contraction is possible. Though historically, in developing economies, higher productivity tends to fuel growth and job creation. Luna: What about the sustainability of the gains? Did the firms keep it up after the study ended? Lucas: The researchers checked a year later. The improvements had mostly stuck. Some practices even spread to other parts of the supply chain. The key was that the consultants taught owners how to diagnose problems themselves. Luna: So it's about building capability, not just transferring a checklist. Lucas: Exactly. And that's a lesson for policymakers. Instead of subsidies or high-tech interventions, maybe the most cost-effective thing a government can do is subsidize management consulting for small and medium enterprises. The ROI would be extraordinary. Luna: Has any country actually done that? Lucas: A few. Singapore has had a long-standing program. Recently, the UK piloted a similar scheme called 'Growth Vouchers' but it was small-scale. In practice, it's hard to scale because good consultants are scarce and the context matters a lot. Luna: But the potential is huge. If we could replicate the Mumbai experiment across entire sectors, the effect on long-term economic growth could be game-changing. Lucas: It really could. And it ties back to a broader theme on this show: long-run growth isn't just about new technology. It's about everyday operational efficiency. The mundane things — how you schedule production, how you track quality — can add up to a revolution. Luna: So next time someone talks about the productivity slowdown, maybe the answer isn't a moonshot — it's a better clipboard. Lucas: Ha. A clipboard with a kanban board. Exactly. The data from Mumbai suggests we already know how to boost productivity at low cost. The real challenge is diffusion — getting these simple tools to the millions of firms that still run on instinct. Luna: And that's something every listener — whether you run a business or just follow economics — can think about. What's the one simple process change that could make a big difference in your own work? Lucas: It's a great question. For this episode's final thought: the next productivity breakthrough might come from a consultant's playbook, not a patent. Thanks for listening.