The productivity puzzle is set to become one of the biggest business debates of 2015, with George Osborne expected to base a large part of the budget on helping the UK move up the international league tables.
What is productivity?
Before I go any further, let me try to define what “productivity” actually means. There are numerous definitions being put forward, but perhaps the easiest one for us to relate to is:
A measure of the efficiency of a person, machine, factory or system in converting inputs into useful outputs.
The so-called productivity puzzle is the unexplained disparity between the UK’s economic performance improving and its labour productivity per hour worked falling. The mystery is a popular topic for the media, politicians and economic commentators and it’s not difficult to see why.
The UK has seen more than 1m new jobs created in the last two years and there is real evidence of economic growth, yet productivity still does not match pre-2008 levels.
Economic growth hasn’t improved output
While the economic improvement seen in recent years is welcome, labour productivity per hour is actually 15% lower than the national level achieved before the financial crisis. If it is not reversed, this has the potential to damage both the country’s economy and the population’s living standards.
Experts have been struggling to explain the reasons for this collapse, pointing to low pay and misdirected investment in sluggish companies as possible factors.
Others have suggested that a failure to develop the skills of existing staff has restricted many of our companies from performing to their full potential, while the CBI suggest that a simpler tax regime could play its part in securing greater productivity.
Manufacturing industry taking the lead
However, the manufacturing sector is performing rather better, recording higher than average productivity when compared with the service and financial sectors.
Our recent Manufacturing Barometer survey, which questioned the leaders of over 500 businesses, provides strong clues as to why manufacturers are bucking the trend and, more importantly, how they are doing it.
The overriding feeling from the report is one of optimism, with 70% of businesses expecting sales turnover to increase over the next six months.
They believe that economic growth will be achieved alongside increased employment, with 55% predicting a rise in staff numbers. However the survey also found that 84% of manufacturers recognise the need to improve productivity even further.
Investing wisely could help manufacturers
That sets up an intriguing question: how can companies grow and at the same time become more efficient? The answer can be found partly in targeted investment.
Over half (53%) of the SMEs we surveyed expect to increase their investment in machinery and premises, and 95% intend to keep up their current level of investment. By commiting to investment, manufactuers are encouraging innovation in new product development and resource for more efficient processes.
Over the last three years, the Business Growth Service, a government-backed initiative, has committed £18m of tailored manufacturing support through the Manufacturing Advisory Service to assist businesses in making vital improvements with a view to increasing Gross Value Added and creating new jobs
Our Business Growth managers, who work with ambitious firms to help them overcome barriers to growth, were able to support management teams to introduce lean manufacturing, improve scheduling, put in better supply chain management controls and secure finance towards the purchase of new machinery.
Skills development
However, investment in technology and process is only one part of the productivity equation. Equal priority needs to be given to developing staff and ensuring they have the necessary skills to implement improvements and support growth.
This isn’t just a quick fix; you need to take a more holistic approach to improve your company. This includes building a high-performance team , encouraging innovation among your staff and identifying skills for the future.
Through the Business Growth Service we have committed £35m of funding to this area so that firms will be better equipped to make the right decisions and complete the business improvements they need. We are also able to actively direct SMEs towards apprenticeship schemes and other training.
This positive outlook from our manufacturers, and their commitment to invest, bodes well for improved productivity. These same strategies could be just as effective in solving the issue in other sectors, helping to train and develop staff and improve business processes.
Get the balance right and we may just have found the elusive answer to the productivity puzzle.
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