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Mar 23

Pareto for Productivity

Pareto, a 19th century Italian economist, spotted that “80% of effects arise from only 20% of possible causes” – apply this rule to national productivity levels and just the top quintile of companies determine whether improvements are made – and it has been ever thus

In other words, the great majority of companies are doing little or nothing to improve their productivity – not only do they lag far behind the vanguard companies but the productivity gap between them could even be widening, especially when patenting and intellectual property rights restrict the spreading of new ideas and better ways of doing things

Andy Haldane, chief economist at the Bank of England, recently supported this view by arguing that, if UK firms in the three least productive quartiles were able to improve at the same rate as companies in the top quartile, overall UK productivity would rise by 13% – whilst we might question the veracity of the data he used, we fully agree with his view that most companies have enormous scope for improvement

So, given such a distribution of companies applies to most nations, not just the UK, a two-pronged national productivity improvement effort is needed by all viz:

  1. Incentivise the 80% of companies/ organisations that lag behind leaders in their sectors to improve productivity levels:

    1. First, offer them good measures that clearly establish their current productivity levels and scope to improve relative to others – otherwise most will assume they’re at least average, have little to worry about and so need do little to change

    2. Also, provide education/ help in how to cut waste and make best use of existing costly resources – most will have the opportunity for at least a 20% improvement from these actions alone

    3. Then, after successfully completing the above, have them consider using latest best practices and major investment in new resources and systems – and so will need advice/ support to do this

  2. At the same time, encourage the vanguard 20% of organisations in each sector to at least continue to improve as before, not least by offering more financial incentives for more ‘open research’ and ‘market creating innovations’

For too long, productivity improvement has been ignored by most organisations despite it being more important than just about any other business issue

And, if and when it does appear on the national radar, the focus is usually on progress made by vanguard organisations in the manufacturing sector i.e. the 20% of a sector that comprises only some 15% of any developed nation’s GDP i.e. a mere 3% of its economy!

Is it any wonder most managers and ministers don’t ‘get it’ and national productivity improvement staggers from year to year

They’re all focussed on other ‘key result areas’ i.e. areas of less importance

They need to understand Pareto’s Rule and its relevance to productivity

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