Member Article

Productively Lazy

Productively lazy?

You could be forgiven for thinking that we in the UK are a lazy bunch.

The bank-run on Northern Rock in 2007 heralded the start of the Great Recession and since then labour productivity in the United Kingdom has been remarkably weak. Whole economy output per hour stands some 16% below the pre-crisis trend and productivity is still some 4% below its pre-crisis peak, according to the Bank of England. For a trading nation we should be alarmed that output per hour worked is 30% higher in the USA and 29% greater in Germany. Moreover, although there is a lot written about the challenging economic conditions in France, it is still 28% better than the UK.

So what is causing these poor levels of performance? Economists don’t fully understand the reasons and call this the productivity puzzle, for which they have a number of hypotheses. Firstly, part of this may be due to measurement criteria which considered R&D expenditure as consumption rather than investment. Secondly, self-employment has risen by 600,000 and many of these may be underemployed. Another reason is that some companies may have been unable to cut staffing levels below a minimum threshold in order to keep their businesses ticking over. Firms may also have kept staff on in the hope of a recovery in the economy. Also, low productivity levels may be explained by cyclical forces which decline during economic downturns.

Yet another explanation is that the UK’s investment in capital stock has declined during the past six or seven years due to economic uncertainty. The level of capital stock available to each unit of labour/employee significantly influences labour productivity which may partly explain higher production levels in the USA, Germany and France. It would appear that some organisations consider employing people to be a cheaper alternative than investing in capital equipment, which may be true in the short-term but is hugely damaging in the longer term.

What does this mean for managers?

So what does all this discussion of the dismal science of economics mean for managers? We don’t think it’s that people are lazy.

(1) It is possible that many of your employees are underemployed and there is scope for increasing their productivity. Identifying where improvements can be made is a joint responsibility for managers and employees.

(2) Financial managers should be aware that short-term cost savings through reduced investment, while perhaps necessary, will not benefit the organisation in the longer term.

(3) Productivity per person can only be squeezed so far and increasing pressure too much on employees may result in increased stress, fatigue and absenteeism. With a growing economy and more jobs available, employees who have been biding their time may decide that now is the time to jump ship.

(4) One of the most powerful means for increasing productivity is to invest in organisational design so that inefficiencies can be culled from the production process. This is true whatever the industry, whether it be primary, manufacturing or services.

(5) Finally, increased organisational productivity will grow real earnings and enable you to boost dividends and wages.

A practical solution to increase productivity

So here’s one practical step you might consider. We think some of the greatest opportunities for an increase in organisational productivity stem from removing the system and process heavy performance management systems that have come to dominate business over the last couple of decades. They are the Emperor’s new clothes. They have created an illusion of progress where none exists. To this day, the evidence that performance management systems contribute to profitability is at best weak. Organisations need good goals. They need managers working on these rather than filling in forms about working on the goals. Imagine the cost saving if organisations stopped requiring managers to complete performance management records - each manager would save days per year - time that could be spent on doing business. IT costs would be lower and quite possibly engagement scores (highly correlated with productivity) would increase.

Whether you like this idea or not, what is abundantly clear is that we cannot continue the way we are going. We need to do things differently and that means challenging assumptions.

Dr John Wilson & Dominic Irvine

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This was posted in Bdaily's Members' News section by Dominic Irvine .