Objectives:

Reducing the costs of management appears an easy target for those seeking to generate savings or to promote better spending in the National Health Service (NHS). However, an assessment of the appropriate amount of spending on management requires an evaluation of how much management contributes to organizational performance.

Methods:

Using routinely available NHS acute hospital data, an econometric analysis was undertaken to test the hypothesis that there is a relationship between the proportion of a hospital's income spent on management and the performance of the hospital measured along three dimensions: the achievement of financial targets; performance against waiting time standards defined in the Patient's Charter; and costs of service provision.

Results:

No general relationship was found between management costs and hospital performance. However, there was some evidence of a quadratic relationship between management spending and the amount of operating surplus generated and performance against the three-month waiting time standard for an inpatient admission specified in the Patient's Charter. These results suggest that performance returns reach an optimum when management expenditure is around 5–6% of hospital income.

Conclusions:

The evidence is not yet strong enough to draw a general conclusion that management costs in NHS acute hospitals are too high or that an undiscriminating reduction in management costs would have no detrimental effects on hospital performance. However, the findings should prompt managers to identify ways in which their activities are productive and how these can be measured, and what distinguishes effective from ineffective management.