Major failings of productivity measures

All managers need to know they’re getting the most out of all costly input resources employed:

  • In the private sector, to beat their competition, minimise unit costs and maximise sales and profit margins
  • In the public sector, to optimise the number and quality of services on offer

However, most managers do not measure productivity well – they have plenty of financial productivity measures but little else – the result is most are far from getting the most out of their existing input resources

What’s going wrong – why is a simple productivity ratio of outputs divided by inputs not measured by all?

Survey after survey produce the same results – managers think productivity is too difficult to measure, ‘not a boardroom issue’, not the main determinant of their financial success or relevant only to the shop-floor – ‘it’s someone else’s problem’

At the same time, management organisations like the CBI and leading business schools ignore the subject on their websites – a sure indicator of the importance they attach to the subject

So, given this paucity of measures and support for them, is it any wonder current productivity growth in most organisations and nations is flat-lining

A sudden change in management attitudes is urgently needed

And, if this were to happen, there are six major failings of productivity measures they would need to consider:

  1. A partial, not total, productivity picture painted:
  • Important outputs nowadays are not just sales volumes of cars or insurance policies, say, but also quality and service level outcomes associated with those sales – yet the latter are ignored by most productivity ratios that do exist
  • Important costly inputs include labour, materials and/ or capital (i.e. plant, equipment, offices) but labour volumes are the only ones measured – labour quality (i.e. the variation in skills, experience, education levels, qualifications), which can make a big difference to productivity levels, is also ignored
  • Hence, most productivity ratios quoted offer only a fraction of the ‘big picture’ needed – so many productivity problems and opportunities pass by unseen

2. Lack of useful benchmarks:

  • External best practice information is only sought by better private sector companies – and rarely by any public sector unit, even though the information should be in the public domain and readily available to them
  • Most organisations have no idea what their overall capacity is because of the variety of goods and/ or services they offer – so they don’t know how much more they could be doing with the resources they’ve already got

3. Lack of regular, timely measures:

  • Important performance information is often produced quarterly or later when a manager needs it weekly, say

4. Few links down or up to lower/ higher levels of management:

  • Managers cannot drill down to identify problem causes – nor up and across to check on the impact changes made might have on others
  • Different levels use different measures, so don’t talk the same language, so don’t understand each others’ problems

5. Too short a time horizon is sometimes used:

  • One input may be cheapest at first but most expensive in the long term e.g. the quality of a hip replacement used in an operation
  • Some companies have to invest heavily upfront (e.g. oil wells, coal mines), make big money with stuff that’s easy to extract, then less with the following more difficult stuff until all peters out – in such cases, whole-life productivity measures are needed

6. Too much aggregation destroys the value of performance information:

  • One cannot have a mix of quite different outputs and inputs and compare the two unless all are can be converted into cash
  • This aggregation problem increases the higher one goes in any organisation
  • It’s even worse at national level where productivity measures have been described as ‘pointless and unusable – they spread misinformation, not knowledge’

Conclusions:

  • Overall, productivity must be measured well if it is to be managed well – at present, very few managers do this well – they’re ‘flying blind’ – they’re not in good control
  • At national level, expert economists, politicians and the media forever moan about the lack of productivity improvement and stagnant living standards – but they’re mostly spectators and their views are based on seriously flawed national measures – hence, most can be ignored
  • It’s at organisation level where most (80%?) national productivity improvement potential lies – and it’s the managers of those organisations, public and private, who alone have the power and so potential to make the changes necessary
  • They just need to know where, when and how – then most will surely act

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