Raising management standards in Africa

Inclusive Economy11 Sep 2014Micheline Goedhuys

The inability of African firms to implement management practices that conform to basic international standards is a barrier to enter global markets, depressing their productivity and employment creation potential.  An agenda to raise management practices to world standards is desirable, but challenging.

In recent years, standards have gained more and more weight in international trade and the governance of global value chains. The standards in question are not limited to technical product specifications, but increasingly extend to processes and generic management systems. A well-known example is the ISO 9000 family of quality management standards, which is also the most widely diffused management standard in Africa. There are also standards for management procedures related to environmental conduct (e.g. ISO 14000) or working conditions, which adopt a similar approach. This approach foresees that businesses which actually implement international standards can voluntarily apply for a certificate. The firm then has to undergo regular external audits to obtain a certificate of conformity as an official acknowledgment of meeting those requirements.

In deciding whether to seek accreditation, firms consider both costs and benefits. The cost of going through the procedure to apply for and renew the certificate is high, especially for small firms. The total costs are also higher when management practices are unprofessional and need substantial upgrading. Counterbalancing those costs, two types of benefits can be identified.

First, there are effective improvements in operational performance and cost reduction, as a result of better managed production processes. Firms have to question and improve their practices on inventories (reducing working capital costs), restructure their plant layouts, and introduce new equipment to boost productivity and enhance product quality. Second, firms also use certificates strategically, to “signal” to external parties that the firm is a high-performer on quality management issues. Signalling reduces management and monitoring costs in global supply chains. This is all the more important when contracting parties fear difficulties in enforcing contracts, such as when rule of law and judiciary institutions are weak.

Our research on enterprises in African and other developing countries finds clear evidence for both types of benefits. First, productivity gains appear to be substantial. Management standards considered basic to Western companies still require substantial investment, managerial upgrading and organizational change from local African suppliers. In this way, implementing world standards can trigger innovative behaviour and structural change in these firms. Further, accreditation boosts firm growth and employment creation, partly because they become more efficient, and partly because they can convincingly signal their commitment and engage more easily in contracts.

But the rising importance and increased complexity of standards also involves many challenges for developing countries, making policy intervention desirable. Creating awareness and providing information on standards is a first basic ingredient for a policy on management standards. Clearly, without accommodating the demands of global markets for higher process and product standards, local firms risk being excluded altogether from global trade. Policymakers thus need to provide incentives to enhance both the demand for appropriate standards by firms wishing to engage in international trade, and the capacity of local providers to support local firms seeking accreditation.

Support for the business services sector is a key component of this agenda. In some cases this support may be provided by relevant industry associations, and in other cases by specialized providers offering to assist firms to introduce ISO 9000 and ISO 14000 standards. However, this latter group are usually private firms who provide assistance in the application procedure, but they also play a regulatory role in penalising their own clients in case of non-compliance. To deal with this conflict of interest, strong professionalism and audit transparency and monitoring are needed. Otherwise, accreditation is quickly decoupled from the actual implementation of best practice. The effectiveness of standards to trigger innovation and upgrading vanishes and signals to the outside world become less credible.