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Jan 29

Elephants in the productivity room

January, 2017

The great financial journalist Martin Wolf of the FT recently opined about the current state of UK productivity – disappointingly, his words offered no new insights and were simply a regurgitation of current groupthink.

He kicked off with the well-worn cliche from Paul Krugman about productivity being ‘almost everything’ – and then trotted out a bunch of statistics about population and productivity growth, the two factors which indeed determine national prosperity levels:

  • The working-age population stats could well be reasonably accurate, and show the UK has little potential for significant growth from that quarter

  • But the national productivity stats (GDP/ labour inputs) about the UK’s relative position versus other nations are seriously flawed – nevertheless, like most important commentators, he ignores this widely accepted fact and proceeds to draw conclusions based on them

He rightly points out that there are big differences between the performance of ‘the best and the rest’ in all UK sectors, and that such differences appear to be growing – “a slowdown in the diffusion of knowhow and slower elimination of zombie competitors” being the received wisdom – however, this does not explain why the UK is so much worse than most others

So what’s his ‘big aha’?

By simply comparing the UK with its international competitors (using more spurious data) he spots two fundamental UK weaknesses which explain most of the prevailing productivity gaps:

  • Lack of investment in capex – “physical investment in machines, buildings, ICT and R &D, is very low” – but how much more would be needed to close any gaps (£10bn, 100bn, 1000bn?) – and what of Robert Gordon’s claims that the days of major new productivity-improvement inventions are over?

  • Lack of investment in human capital – “skills overall remain highly deficient” – there is indeed a serious mismatch between the skills organisations need and what kids now study but nobody knows the size of these gaps, nor the potential % GDP and productivity benefits if they were closed, nor the amounts to be invested by whom – all we do know is too many kids (50% was the target) sally off for a very-expensive three year stint at university to graduate in subjects many employers don’t want

The biggest problem facing all organisations, and nations, is not lack of investment but lack of good performance measures and the knowhow to find and implement solutions to productivity problems and opportunities highlighted

At present:

  • Most have only some 20% of the performance measures they need – and they’re mostly financial

  • Most could improve productivity by at least 20%, some over 50%, either by upping output/ sales and/ or reducing inputs/ costs

  • Most do not need any major investment to get these results – instead, they should first focus on cutting existing waste and then optimising use of their existing resources, both of which could involve only modest extra investment in human capital and new systems

  • Only then should they consider any major investment in best practices and/ or new technology

 The fact is most UK organisations (80% = ‘the rest’) perform well below their potential – they could make giant productivity improvement strides if only they had the right measures and knowhow – but such a message is the biggest elephant in the productivity room

 

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