Productivity in an unsettled economy

productivity puzzleProductivity in both national economies and individual businesses is much scrutinised by governments, business commentators and business owners as an indication of performance, efficiency and economic health.

The basic components for calculating productivity are the level of output achieved compared with inputs and is normally reported in terms of labour output or return on capital employed or sales per square foot in the retail industry.

At national level improvements in productivity are used to indicate the health of the economy, so that the recent improvement of UK labour productivity in the three months to September by 0.9% announced by the Office for National Statistics (ONS) was welcomed, albeit national productivity is still way below its pre-2008 Financial Crisis level.

In the same way productivity is a seen as a measure of national economic health, so is productivity a measure of the health of an individual business.

It should be noted that the ONS measures output per worker, output per job and output per hour but not the cost of the output where investment in technology would improve productivity as measured by the ONS but it would most likely reduce employment which is hailed as another measure of national economic health.

Why is productivity so important?

In the 21st Century, and a volatile economic environment due to factors such as Brexit uncertainty, increasingly global competition and concerns about inflation, the cost and assessment of risks of investing in improving productivity are complex and all too often are easily put off by unexpected external factors.

The risk of putting off investment in improving productivity often results in service and product quality declining, costs increasing and time to market increasing.

Historically the location of manufacturing was determined by property, labour, energy and time to market costs where the costs of these factors are constantly changing, and new factors are making the equation complicated.

It is helpful to decide what factors are really important and therefore what should be measured and monitored in order to get the right productivity improvements. ‘What gets measured, gets managed’ and critically the choice will have an impact on short and long-term profitability and short and long-term cash flow.

The decision to put off investment in equipment and machinery for instance is likely to involve increasing borrowing and possibly redundancy costs which while great for long-term profitability and cash flow may be risky and may not be affordable if the redundancy costs are high.

At its heart, productivity relates to viability and sustainability. Competition in most markets is fierce and requires a degree of risk taking to stay ahead since falling behind your competitors in terms of productivity means you are less likely to survive.

How can a business improve its productivity?

For many companies a high wage cost was in the past reduced by offshoring or sub-contracting to low cost labour markets, but this introduced time and transport costs. But these benefits don’t last for ever and there comes a time when this model needs to be reconsidered.

A business can be regarded as a system of systems where labour interacts with equipment as a form of efficiency or labour-saving tools. The equipment can replace labour or make it more efficient by saving time. Indeed, robots can work three 8 hour shifts without much down time. However, they need developing, installing, setting up, monitoring and maintaining, most of which requires highly paid labour to replace the often low-paid workers that did the work before being replaced by robots.

IT offers huge scope for improving productivity through new systems, whether processing data, document management, accounting, communication, planning or monitoring activities. It all requires training and experienced people to operate it but the savings and increase in output tend to be huge.

Use of online services is also an area that is growing whether obtaining legal advice or processing litigation claims, accountancy services for instance to reconcile your accounts with your bank statements, using promotion and marketing platforms or myriad more services.

The use of flexible and zero hours contracts by some businesses to manage the peaks and troughs of work flow helps avoid paying for labour when it isn’t needed. This has an impact on gross profits and involves measuring productivity against variable costs.

Another area for investing in productivity is to review the need for managers and administrators. While they tend not to be directly related to the variable cost of production they are a direct cost and have an impact on net profits where measuring their productivity is against direct costs.

In addition to the focus on getting the right balance of labour and equipment, employee commitment is also key to productivity. Just look at the days lost to strike action by Southern Rail.

A motivated work force can have a huge impact on productivity. I am always impressed by the bin collectors who I now always see running between houses.

Training and investment in skills, rewards for performance, recognising personal needs for family support or career enhancement. listening to them and the working environment all add up to a workforce knowing they are valued and respected. It is unlikely to be all about how much they are paid although there are low pay thresholds where a lot of staff live from pay cheque to pay cheque such that a small amount of extra pay makes a huge difference. Whatever the means of motivation, it is all about respect for your people and how they feel valued.

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