SBA

Productivity is Down

The major business event since my last article has been the UK Chancellor’s Autumn Statement and his recognition of the UK’s low productivity. I am delighted to see this, there have been several authoritative reports over the past couple of decades comparing the productivity of UK industry unfavourably with France, Germany and the USA, but to me it has felt as though the UK, and by extension the Isle of Man because of our strong business connections and similarities, has plodded along the same old path in denial of the problem.

The document which appears to have finally made the difference is the SPERI (Sheffield Political Economy Research Institute) paper titled “Innovation, research and the UK’s productivity crisis” published earlier this year. It’s online, if you Google for it you will find it. Its hugely eminent author, Professor Richard Jones, tells us that UK productivity is around 13% below the G7 average, and 24% below the world’s productivity leader, the USA. France and Germany are both within spitting distance of the USA, whereas the UK is languishing at the bottom of the G7 league with Italy.

It’s not that British productivity has been falling overall, although it clearly has since the financial crisis in 2008, it’s more that our productivity has not risen as fast as our competitors since the widespread adoption of computers in business. Figures back to 1970 show that French and German productivity has been growing faster than British productivity for nearly half a century. Since the financial crisis British productivity has ceased growing altogether and is actually declining, particularly dragged down by the chronic under-performance of our massive financial services sector.

It’s difficult not to draw the conclusion, which Professor Jones and many other researchers have over the past couple of decades, that the French and Germans have been more innovative in exploiting Information Technology than the British. I recall a previous study at the turn of the century revealing that on average the French get around twenty percent better return on investment from their IT projects than we Brits. The irony to me is that we Brits are widely recognised as being better at inventing new technologies than the French and Germans - we’re just rubbish at applying those innovations within our businesses!

Professor Richard Jones identifies than in order to reverse the trend Britain must invest more in Research and Development, and more in Innovation - which practically means applying the products of our R&D into our businesses instead of standing by whilst the rest of the world exploits our creativity.

What has this to do with the Chancellor’s Autumn statement? In it he recognised not only our productivity malaise, but also the need for much more UK investment in R&D and Innovation, and committed substantial funds and tax reliefs to several initiatives designed to help raise productivity through the encouragement of R&D and Innovation.

The reality is of course that not all British businesses have been poor at growing productivity, some British firms are clearly world leaders. The whole topic is close to my heart because prior to moving to the island I was a director of a large and mature UK business which increased its value ten-fold over a decade whilst only increasing labour three-fold, and a major contributor to our exceptional productivity was our superior exploitation of technology. We grew to dominate our sector with over fifty-percent UK market share and left our many competitors scrabbling to divide the rump of the market between them. We were not alone in our success; in Britain there is huge divergence in productivity between the best and the also-rans, but whilst the best of the British rival the best in the world, the majority of British businesses are clearly laggards - most British companies must be significantly worse than our principal European and American rivals because our national average productivity is so much lower.

In short the probability is that your business is a productivity laggard, and that its poor productivity compared with G7 peers is substantially due to poor innovation and exploitation of Information Technology.

I hope that gets your hackles up. It’s an unpleasant thought to face but a statistical reality. A German or French or American worker only needs to work four days a week in order to create the same value as a Brit. We could all enjoy three-day weekends with no loss of wealth, or work the same hours as now but be much wealthier, if most British company bosses were not such luddites.

At this point there should be a chorus of bosses protesting that they already spend a fortune on Information Technology - and sadly they are right. We commonly spend the right money on the wrong things.

To be crystal clear, the money spent on server storage / electronic filing systems, access control / user directories, email systems, Word, Excel, Powerpoint, anti-virus etc. is almost worthless. It’s a cost of being a 21st Century business, it doesn’t add value because almost everyone has it irrespective of whether they spend five thousand pounds per worker per annum providing it, or buy a Google GSuite subscription (formerly Google Apps) for thirty-three pounds per worker per annum. There is of course a big difference between these two options - for thirty-three quid a year Google is probably less likely to lose your data to a system failure or ransomware attack than the million pounds worth of in-house IT equipment being run by your very expensive on-payroll technicians.  

Base IT infrastructure, the stuff I’ve mentioned above, does not add business value, does not significantly enhance productivity, does not make your business more competitive - because everyone else has it too, the only variable is how much money they pay / waste on buying it. It is of little more significance than the stationery cupboard - and most businesses soon grind to a halt if they run out of paper. Spending a fortune on everyday IT does not equal innovation or technology exploitation.

So what does? How do we exploit Information Technology to make a worthwhile productivity difference to our businesses? Fundamentally we need to be using IT to do three things: reduce the work done by people, automate business process, and eliminate re-work - these are the labour productivity drivers. There are other important dimensions of IT, such as better information leading to better decision making, but productivity is about delivering more output with less labour.

I could fill the rest of the newspaper with examples of using IT to increase productivity, but I’ll give you one very simple and common case which you will have seen - customer address capture. This is a perfect demonstration that improving productivity is not difficult; you just ask for the customer’s postcode, type in those six characters, ask which building and select it from the list with a click of your mouse, and you have accurately entered the customer’s address into the computer. Manually capturing an address over the phone typically takes a couple of minutes or more and commonly includes mis-spellings, using an address capture system takes half a minute and is correct first time.

Productivity improvement is not rocket science, it’s achieved by making many small savings on frequently repeated tasks. Capturing data by getting the customer to type it in for you, auto-dialling outbound calls, automatically calculating the correct pricing based on the customer’s discount rate, automatically printing / emailing the appropriate documents, automatically reconciling payments to invoices etc.  are all examples of common automations applicable to the majority of businesses. They save effort, reduce errors, and the chances are that you already do some of them.

So what are our competitors doing differently to us? Basically they’re walking around their businesses and asking themselves what they can automate next, and what common mistakes or problems can be eliminated, on a continual basis. They put these changes / improvements into their computer systems on a continual basis, making system changes every week - until they run out of ideas. Instead of just doing the basics they systematically try to automate everything in sight.

It was put to me a few years ago that the employees who achieve best labour productivity have several key characteristics; they are intelligent, goal oriented, open to change, and downright lazy. They want to do as little work as possible for the achievement of their goals and will seek to modify their work environments accordingly.

So herein is the formula for achieving maximum productivity by better use of IT. Think lazy, avoid all the work you can avoid, automate as much work as you can, spend your IT budget on automation, and do it continuously - a week without a productivity-enhancing IT change is a week when your competitors did better than you. Laziness, in business, appears to be a virtue.