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How to solve the productivity conundrum

Author: ICAEW Insights

Published: 09 Jan 2023

While weak productivity is a contemporary international phenomenon, the British case is particularly acute. We ask what UK business can do to help reverse the trend.

The United Kingdom’s economy has long been plagued by anaemic productivity – historically UK labour productivity hovered reliably around 2.2% a year. But since the 2008/09 global financial crisis, it has stagnated to between 0.3% and 1%. 

To solve the problem of growth and productivity, British employers this month called on the government to allow more ‘economic migration’ to help companies still struggling to recruit and grow. The Confederation of British Industry (CBI) said at its conference that Britain should create a programme of temporary work visas to boost economic growth.

But politicians are pushing back, arguing that British businesses should stop relying on imported cheap labour to fill job vacancies and start investing in people and skills at home to reach the goal of a high-skilled, high-wage economy. 

Immigration has long been considered a silver bullet to economic growth and productivity, but the mood music appears to be somewhat changing on how to solve the UK’s productivity conundrum. By the start of 2023, the UK is set to be the only industrialised country with lower employment than before the pandemic, according to research by the Institute for Employment Studies (IES).

The battle lines between politicians and businesses look like they are being reset. Politicians want employers to invest more in people and skills. Indeed, this has been an issue for several years. The Office for National Statistics (ONS) reports that UK business investment has fallen in recent months and remains below pre-pandemic levels. 

Employers and business representatives, however, contend that the government has failed to follow through on promises of business support, namely using tax policy to incentivise employers to upskill in national skills shortages.

On the flip side, a lack of investment in training, skills and new technology fail to carry much weight when considered against a backdrop of record levels of corporate cash balances and share buy-backs over the last couple of years.

“In defence of many businesses, we’ve had quite a long period of uncertainty. And there’s a strong belief among many employers that if you train people, particularly in a period where the labour market is quite buoyant, they’re just going to leave,” Stephen Bevan, Head of HR Research Development at the IES.

Nonetheless, employer efforts to train their existing workforces are woeful, according to IES research, which shows that the proportion of people in work who are receiving job training is falling. In 2005, roughly 30% of employees were receiving training. Today, the figure is around 25%. And delve beneath the figures and it emerges that 50% of that training consists of things such as inductions and health and safety training.

So, what can organisations do now to improve productivity? Overwhelmingly, training and retention of existing workers are vital to boost well-being and therefore productivity in a workforce. 

A focus on health is emerging in light of growing evidence that shows that apart from the 500,000 people lost from the workforce post-pandemic, there are 2.5 million people out of work due to long-term illness since before the pandemic. And with the NHS buckling under lengthy waiting lists for routine procedures, maintaining a healthy workforce should be a priority for employers.

Due to COVID-19 and the rise of long COVID and mental health issues, “there's been a positive uptick in interest among employers in what they can do to improve the health of their workforce, which is brilliant,” Bevan says. “However, my caveat would be you have to invest in well-being programmes for which there is an evidence base,” he cautions.

“We’ve been noticing a big rise in mental health work such as mental health first aiders, which intuitively looks like an attractive intervention. Unfortunately, there is no evidence that mental health first aiders make any difference at all to workforce mental health. The danger is that investing in those sorts of initiatives, well-meaning though they are, will crowd out investment in things that make much more difference such as risk assessment on stressful work conditions or workloads,” Bevan says.

In the short-term, Neil McFerran, partner at EY, says that more rapid adoption of technology, and automation in particular, is critical to improving productivity. But technology alone is no silver bullet, McFerran warns. “There is certainly a huge motivation to leverage digital solutions to drive productivity, but I would question whether the investment is backed up by the necessary change management and embedding of that. If the underlying culture processes within the business do not evolve accordingly, you’re never going to get the full benefit from it,” he says.

Tightening processes and streamlining back-office systems can also reap some productivity benefits depending on the business size and sector. Slack systems and processes mean employees often get pulled into tasks that are not in their remit, particularly in services industries.

At the same time, McFerran says clarifying and tightening job specifications, particularly where there’s a lack of robustness in back-office processes, can also help. “There should be a lot of focus on making sure people’s roles are clear, to make sure people are doing what their role should be rather than organic development of a role based on how inefficient the processes are within that business,” he says.

In terms of general productivity around people’s roles, the UK is “lagging a little bit”, but most countries are, Ferran says. Part of the reason for this delay in productivity is to do with companies’ inability to embed change processes and avoid sliding back into former, unproductive approaches. “You need to keep the pressure on and make sure that becomes embedded in standard ways of working. The ability of British companies to keep that pressure on is mixed,” McFerran says.

Bevan agrees that a clearer definition of job roles, clarity of roles’ objectives with robust performance targets, investment in training, and incentives and consequences for good performance are required to boost productivity. He also says that better support for middle management would also greatly improve output.

“One of the things we need to look at more in the UK is whether or not we’ve got professional enough approaches to management, and how support for middle managers to do their jobs better could, in the medium term, make quite a big difference to productivity. That’s an area where I think we should be investing a bit more effort,” Bevan says.

One critical failure of British business collectively is its inability to measure productivity. The UK is dominated by the services sector, and services prove more difficult to measure than hi-tech manufacturers of products such as automotives or pharmaceuticals. But while it is more complex to measure intangibles, it is certainly not insurmountable.

A fundamental re-evaluation of supply chains is also required, as well as thinking about what the right supply chains might look like for the next 20 years, McFerran says: “There is a direction of travel that suggests some element of nearshoring will assist with planning and therefore making sure that your overarching sales and operation planning process is more robust, that you can manage productivity accordingly.” 

Meaningful improvements to productivity are unlikely to bear fruit for several years. But output per person must change in the UK if we are to become a more productive economy. And that’s not necessarily about working harder, but smarter. Evidence suggests organisations are aware of what needs to be done but are not transforming fast enough.

It’s imperative to transform business over the next two to three years so that UK business emerges from this tumultuous time healthier, happier and more productive. There are green shoots emerging but there is much more to be done, and now is the time to do it.

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