Suits, Not Suites, Determine Firm Performance

Let’s hear it for "the suits." That’s the phrase Wharton School management professor Ethan Mollick applies to the phalanx of middle managers who populate an important ecological niche in our modern business environment. These folks, writes Mollick in a new report, are "often overlooked and sometimes maligned" in the business world. But they are often the keys to effective performance, not just "interchangeable parts in an organization."

In his paper "People and Process, Suits and Innovators: Individuals and Firm Performance," Mollick argues that it is time to look at the real people who accomplish the work in business organizations, not just the abstractions on organization charts. In this, he is swimming against a tide of organizational studies that look at structure and function—things such as business strategy, management systems, HR policies, and practices—as the drivers of success or failure.

"Performance differences between firms," Mollick writes, "are generally attributed to organizational factors—such as routines, knowledge, and strategy—rather than to differences among the individuals who make up firms. As a result, little is known about the part that individual firm members play in explaining the variance in performance among firms. The absence of evidence at the individual level of analysis also prevents a thorough understanding of which roles beyond those of top managers contribute most to firm performance."

Much of modern management science ignores the importance of people on the end product, says Mollick. "Is firm performance driven by people or by process?" he asks. "The strategy and organization literature has historically argued that a good process is the key to good performance. The result is a long tradition of using organizational factors, rather than differences among individual employees, to explain differences in firm performance." Not enough academic work has focused on the role of people in those structures.

This is not to denigrate top management, says Mollick. The CEOs and CFOs set the overall direction, which is clearly important for business direction. But most earlier studies overplay the role of the executive suite and underplay the roles of the non-executive suits. His paper suggests that differences in top management explain less than 5% of firm performance among Fortune 800 firms, concluding that "top managers, at last, account for relatively little of why some companies perform better than others." But when it comes down to actual performance, "it is all about the middle managers."

Another school of thought elevates the role of "innovators"—the creative, outside-the-box types—in explaining business success. Neither conventional approach adequately explains why some firms prosper and others do not, according to Mollick. "It is the individuals who fill the role of middle managers—the ‘suits’—rather than the creative innovators that best explain variation in firm performance."

Mollick examined the computer gaming industry in his research for the University of Pennsylvania’s noted business school. But his work likely has application across other businesses, particularly where knowledge, not just rote activity, lies at the roots of success. Looking at the gaming business, Mollick decided that middle managers accounted for some 22% of the variation in revenue among projects, compared to 7% explained by "innovators" (the propeller-heads) and 21% by the organization itself (strategy, leadership, and practices). While Mollick looked at a new, high-growth knowledge industry, gaming for personal computers, he found, "Even in a young industry that rewards creative and innovative products, innovative roles explain far less variation in firm performance than do managers."

Many analyses of organizational behavior argue a variation of the old saw, "The clothes make the man," suggesting that the organizational structure and culture determines individual performance. Not so, argues Mollick. "This is not about a person being a good fit in just one specific organization," he says. "Their skills are useful anywhere." Good managers are not just cogs in the business machine. "There is something innate in them that makes them good at what they do."

Middle managers in every business environmental have "a tough job," says Mollick. They have to function at the daily firing line, balancing finite resources, attempting to control what is often inherently difficult to control, and trying to fit their activities into the overall goals of the firm. "It’s always easy to think about the worst managers you have had," he says, "the ones you see in the Dilbert cartoons. But it’s important to recognize the vital role these middle managers play in making sure that information flows and that creativity happens."

—Kennedy Maize is MANAGING POWER’s executive editor.