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Ben Green

By Ben Green

18 Jul 2017

Problematic Productivity: What’s Going On?

Productivity - Welding

We’re all about productivity at Khaos Control. We’ve been helping companies work more efficiently with our business management solution for nearly two decades. But outside the Khaos Family, all is not rosy for the British economy.

UK productivity, how much overall wealth is produced in a given unit of time, is problematic. We’re behind the U.S. Behind Germany. And even behind France. In fact, according to the Office for National Statistics, it’s now lower than at any point before the Great Recession. Productivity in Britain has suffered its worst decline for about two centuries, all in less than a decade.

Productivity Problem - Chart

In this post we’re going to get to the bottom of what’s going on. Because productivity matters. In the long run, if we don’t get it right, we’re going to be significantly worse off and unable to pay for the public services we all use.

It’s clear the issue is complex – if we knew definitively what was responsible for our productivity problem, we would swiftly address it. There are many different explanations, some of which could be equally true, and as many solutions.

Let’s look at those different explanations before thinking about what can be done.

An Ageing Society

Baby boomers are retiring and leaving the workforce at a rate which exceeds young people joining it, meaning a growing proportion of society that isn’t working and in some cases, must be expensively cared for, absorbing the time and resources of those who still are. It all points to more people doing less, knocking productivity.

Less Innovation

Productivity Problem - InnovationInnovation, creating new time-saving technologies that help us produce more in less time, the very definition of higher productivity, is critical. But there are well-established concerns its pace is slowing down. That we’ve benefitted from the ‘low-hanging fruit’ of discoveries and improvements that were comparatively easy to make – electrification, harnessing empty land and universal literacy – and are left either making modest enhancements to existing technologies, such as slightly more efficient cars and refrigerators, or cracking increasingly tougher nuts, like curing cancer.

That nut-cracking when it comes to cancer is getting harder is reflected in lives saved per clinical trial. In the 1970s, each trial used to save on average an extra eight people per 100,000. Now each trial saves one person per 100,000.

But more broadly, a recent paper concluded that holding economic growth at historic trend in the U.S. needs research effort to double every 13 years. That’s a huge – meaning it’s easy to fall short of with dire consequences for American productivity and ours.

Spread of Ideas

Another take is that it’s not that innovation has necessarily slowed, but that its fruits aren’t being taken up by companies as quickly as before.

Why might this be? On the one hand, it could be that our economy’s grown less competitive, so that companies with fewer competitors feel less reason to seize new innovations to stay ahead. On the other, companies may be suffering from weak management that’s failing to implement new technologies and processes.

The Great Recession

Productivity Problem - Bank RunAs the name suggests, the Great Recession of 2008-9 was no ordinary recession. It knocked more GDP off the economy than any since the Second World War, sparked by a financial crisis that shook our banks to the core and made them reluctant to lend.

It’s reckoned this lack of credit, still difficult to come by years after the initial crisis, forced companies to rein in investment they wanted to fund by borrowing. Without it, they couldn’t take advantage of technologies and procedures to make them more efficient.

What’s more, many companies rely on property as loan collateral. When property prices took a hit in the Recession, it limited the amount companies could borrow against it, also putting a dampener on investment plans.

The Bank of England

Interest rates have been at their lowest in centuries, supporting the economy since the Great Recession with cheaper credit. But this intervention may have kept unproductive ‘zombie’ companies afloat that would otherwise have gone bust, holding down overall productivity growth.

Overall bankruptcy rates point clearly towards this effect – they’re much lower than you would expect given the Recession’s severity.

Different Companies, Affected Differently

Productivity Problem - Canary WharfThe productivity problem isn’t affecting companies equally. For some high performers, there is no problem. Research reveals that an elite 1% of companies are enjoying productivity increases on the order of 6% per year. But then at the other extreme, about a third haven’t seen any increases this century.

What sets these companies apart? How can some be getting it so wrong and others so right? This comparison could unmask still more factors at work.

According to the Bank of England:

  • Region – London, the UK’s most productive region, is 75% more so than the North East as its least. But there’s still the same mix of productive and unproductive companies, so region can’t be the main factor.
  • Sector – manufacturing companies are 35% more productive than construction ones on average. But again we see the same mix of over and underperformers in each sector, so it can’t be whole story.
  • Exports – companies selling goods and services overseas are a third more productive than those who don’t. Unsurprising, given they face greater competition.
  • Foreign-owned – if foreign-owned, companies are on average twice as productive as their domestic counterparts.
  • Firm size – although smaller companies grow faster, larger ones exhibit greater productivity, driven by economies of scale.
  • Company leverage – no clear picture here. An unproductive company can borrow to make up for a shortfall in profits, or a productive company can borrow to invest aggressively in new technologies and processes.

Exporters, big companies and those that foreign-owned are those making the largest contribution to UK productivity growth.

What’s to be Done About the Productivity Problem?

To give honest answers here, we must weigh which factors are most responsible for the UK’s productivity problem – it’s pointless identifying solutions for something that isn’t actually having much effect.

And of those factors listed, we can say that each in their various ways are lowering UK productivity with two notable exceptions: the after-effects of the Great Recession and a possible slow-down in innovation.

Productivity Problem - Workers On the Great Recession, while it certainly suppressed productivity in its immediate aftermath by restricting credit, we’re now some way out from the crash and borrowing’s no longer quite so scarce. We needn’t worry about it in quite the same way as perhaps five years ago.

And while innovation might be getting harder in some areas, like medicine, if it were happening across the board we’d see no companies doing really well boosting productivity year-on-year. But we do – remember that elite 1% of UK firms whose productivity’s soaring 6% annually. The problem is the uptake by more inefficient firms of the new technologies and processes that are powering the productivity growth of this elite.

Nor should we anticipate future barriers to innovation – there’s nothing to say that artificial intelligence (AI) is impossible and, while it may take decades yet to be refined, it promises to revolutionise our society the same way the steam engine did in the 18th century, electricity in the 19th and IT in the 20th.

So, thinking about remaining factors that probably remain harmful, what should we do to fight these?

  • Ageing society – raise the retirement age in line with life expectancy increases and top up the workforce with responsible immigration.
  • Spread of ideas – partner productive companies with non-productive ones to share expertise, focus on managerial improvements and encourage companies to evaluate their productivity objectively (since, like when we grade our own driving, companies tend to over-estimate their performance).
  • The Bank of England – with credit abundant, unemployment low and inflation rising, perhaps higher interest rates are overdue.
  • Different companies, affected differently – since foreign-owned companies, and those that export, are more productive, the UK should do more to welcome foreign direct investment and boost free trade (i.e. signing lots of free trade deals after Brexit). Smaller companies could be helped on their way to becoming more efficient bigger companies with reduced taxes and red tape in their way.

And last but not least, but related to the spread of ideas, companies should install Khaos Control! Higher productivity for our customers has been our company’s mission since its foundation. And time and again it’s what we’re proud to see our software, with its multichannel integration, automatic reordering and warehouse management system, achieve. Look at Micro Scooters – £100,000 saved since their 2015 Khaos Control installation. Or Early Years Resources – their cost back in two years with getting Khaos Control as “the best thing [they] ever did”.

Want to be part of the efficient high-growth, high-profit Khaos Family? Request a FREE demo today!

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