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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 – nt 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, the 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 to calculate this specific figure, we fully agree with his overall 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 relative to others – otherwise most will assume they’re at least average, have little to worry about and so do little about it

    2. Then 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. Only after successfully completing the above should they consider using latest best practices and major investment in new resources and systems

  2. At the same time, encourage the vanguard 20% of companies/ organisations 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 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 areas or the on the wrong areas – they need to understand Pareto’s Rule and how it is as relevant today as ever

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