08 December 2017 by Jimmy Nicholls
With productivity growth stagnant, some businesses believe that small steps in management can add up to great strides forward
Poor productivity growth and high employment have been oft-noted features of the British economy in the wake of the financial crash, regularly impacting official growth figures.
In data accompanying the government’s recent budget, the Office for Budget Responsibility (OBR) lowered its real gross domestic product (GDP) forecast from March – citing ‘a significant downward revision to potential productivity growth’ of 0.7 percentage points a year on average for the next half-decade.
Unwilling to endure the stall, some business people are seeking to tackle the problem through better management. Tony Danker, the chief executive of Be The Business, an initiative dedicated to this, speaks to Governance and Compliance about his project.
What those new figures and the budget did was to bring productivity out of being something that economists and policymakers and business leaders talk about and push it into the national conversation.
We are starting to see it discussed on the main news programmes and on talk shows, which confirms that productivity is not just a dry topic for economists; it determines the prosperity of every family in Britain.
“There is something in the British business landscape preventing us, either through competition or cooperation, from diffusing productivity throughout our economy”
What the new productivity forecasts and the new, downgraded growth forecasts show is that, as a country, we urgently need fresh ideas to break the cycle of low productivity.
Government has a role to play, but to get productivity moving immediately, we need a much stronger focus on how businesses can improve their own productivity through changes in leadership and management.
We are strongly of the view that governments do not drive productivity, companies do. Successful productivity strategy for the country has to be rooted in management practice driven by firms, because by definition productivity is the effectiveness of firms at deploying their resources for growth.
While it is important that the chancellor in his budget tackles things like skills, infrastructure, investment and the economy, at the end of the day we are only going to start to move productivity numbers immediately if we boost firm-level productivity.
In the last year, we have started to look at firm-level productivity rather than just aggregate sector or national productivity. When you look at the spread of productivity across companies, Britain has this much bigger gap between the best and the rest, and a much bigger dispersion than Germany, the US and other G7 countries.
There is something going on in the British business landscape preventing us, either through competition or cooperation, from diffusing productivity throughout our economy – because we just have a far bigger spread.
I cannot give you a structural reason that explains why there should be such a big spread in the British economy compared to other countries. So I think this question of diffusion, innovation and the management practices that most drive productivity is the big agenda.
We do know from academic work done by John Van Reenan and others at the London School of Econimics that if you take standard management practices that we know drive productivity and you measure Britain against other G7 countries we do not perform well.
We underperform the Germans and the Americans, for example. So we believe that management and leadership practices are incredibly important.
In our work we talk about four areas of business and management practice that we think drive the biggest effect, given what we have seen through our data.
The first is leadership, which is really about setting vision for the firm, being attentive to its organisational structure and operating system. The second one is future planning, so setting ambitious goals for the firm that turn into real targets.
The third one is talent management, namely getting your workforce engaged and solving problems, developing their skills, management, and measuring how they perform against those targets.
The last one is digital skills, so exploiting technologies – not just advanced technologies but basic technologies – and using data to drive decision making.
What we want to do is get businesses answering precisely that, so we have a tool on our website where we ask businesses to go in and diagnose how they perform against those four levers.
What we would like to do – and we are going to develop research in this area – is get a lot more detail on exactly which levers drive the most return in terms of productivity gains, what exactly is the right deployment of them, and what are the stories of best practice.
That said, we say you should get good at all of them, and even small improvements in all of them lead to big results.
“When you get a number like £130 billion a year, that is bigger than Brexit in terms of its economic impact”
Charlie Mayfield’s commission on employment and skills, which our work is based upon, basically said if the lower 75% of firms in every sector simply made a 10% improvement in how they performed against these four areas that would lead to £130 billion gross value added per year for the economy.
If everybody improved these four things it will have a much bigger yield for our economy than a silver-bullet technology or believing that the chancellor’s expenditure on infrastructure will make a difference.
There are two other things we thought about using. One was to try and add up the size of the prize if Britain’s productivity performance had continued to grow rather than flatline in the last 10 years. Or we could have forecast if we were to grow at 2.5% like we used to, versus flatlining in the next three years.
But I think those come up with numbers that do not speak to firm-level performance. We wanted to pick what seemed like an achievable goal and ambition, which is to say we should all get 10% better at these core business practices.
When you get a number like £130 billion a year, that is bigger than Brexit in terms of its economic impact. As Charlie Mayfield puts it: there is virtually nothing else in the economic debate today that could generate over £100 billion a year of output.
In almost every sector in Britain when you look at these management scores or productivity scores Britain lags the G7.
We do have some of the world’s most productive companies, but you have this problem of lagging productivity compared to other countries when you do comparisons of the data. You see this pattern among big, medium-sized and small companies.
You see it across regions and sectors too. Although there are some regions that are more productive than others, there is high variability within a region and within a sector in a region.
There are some people that want to focus on pioneering firms and pioneering practices, and constant invention and innovation, and Britain being leading-edge. While all those things are important, we are trying to make people realise that a general productivity improvement is eminently achievable – that it is already happening in Britain today.
Nobody needs to invent a new technology. We do not need tyre manufacturers to become software coders. The structure of the economy can stay as is and people can perform better and realise productivity gains just by copying and learning from the people around them in this country.
We are trying to get that message home and make this accessible, because if we do not start to move the hundreds of thousands of firms in the country and their productivity performance, we cannot just rely on two or three leading-edge British firms.
We do not need to build 1,000 Dysons to change our productivity. We need hundreds of thousands of firms to improve their everyday practices by just a bit.
Let’s be clear about structure: yes, there may be a structural problem in the way our businesses compete or collaborate that is leading to less rapid diffusion and spread of good practice. There might be.
But in terms of the factor conditions I have not seen compelling evidence that there is something so different about the structure of the British economy compared to the American economy or the German economy.
People say productivity statistics do not accurately reflect technology. That may well be true, but the Americans are pretty good with technology too, and based on the measurement rules they perform much better than us.
“I do not see eye-to-eye with people that want to try to find silver bullets or magic levers in our economy”
Nor have I seen any conclusive evidence about demographics that tells me that Britain is going to have lower productivity. People sometimes argue that we are a high-employment low-productivity economy and that is the choice we have made, but Germany is a high-employment, high-productivity economy.
I am just not convinced. I have not seen data to tell me there is something inherently different about Britain that says it should be worse at management practice or that it should be less productive than other countries.
Ten or 12 years ago we were doing pretty well on productivity, so I do not see eye-to-eye with people that want to try to find silver bullets or magic levers in the structure of our economy or things that the chancellor could change. I do not believe it.
We think that productivity is driven by firms. There are some highly productive companies in Britain; the task here is to get every firm in Britain improving its productivity performance through management.
I do not think that bad management practices have spread throughout Britain in the last ten years – I have no data that says that we are getting worse.
I think we are pretty medium performers when you compare us in the World Management Survey. Why do I think that is? I do not know. But I think it is completely solvable and addressable.
One of our first programmes we have been doing is a scheme called Productivity Through People. The programme involves BAE Systems, Rolls-Royce, Siemens and GSK working with Lancaster University to develop training for SME leaders in productivity improvement, and in how you drive productivity improvement in your business.
I think interventions like that can make a real difference.