Over the end of 2017 and into this year, two topics have been in the news again and again – productivity and the parlous state of the National Health Service (NHS). Neither of them for their outstanding record of success. It seems that the UK is destined to be eternally behind its major competitors in terms of productivity and playing catch up in the NHS, drip feeding extra money without ever being able to get to a politically successful solution.
The two are of course related. The NHS needs more money. This has to come from somewhere. It can either be paid for by more tax on the current base of ‘income’, or if we become more productive – allowing the additional tax to come from a bigger pie. That way the nation gets a better NHS without lowering current standards of living. So raising productivity is the best way of solving the NHS problem at the macro (and probably micro) level. I want to focus on productivity today – the NHS later in the year.
Sadly the productivity issue is (very) old news. The UK has been behind the US, France and Germany for decades. In 1988, whilst working for the PA Consulting Group I managed a survey of productivity in conjunction with the CBI. At the time the gap was about as big as it is today (it seems to have closed in the 90’s and then widened). The results of the survey were not encouraging, so here we are again in 2018 trying to “Close the Gap”.
Over the last six months a lot has been written about why the UK is not as productive as it could be. Some of the articles make sense, others have statistics behind them (but not necessarily evidence of cause and effect). Here are a few of the more doubtful reasons:
- More people are self-employed (and are less productive because they have to deal will all the bureaucracy?) Family owned and family run businesses (which therefore don’t employ the best or worry too much about good practice?) The so called Middelstat or medium sized companies in Germany that are often family owned are at the heart of that country’s high productivity.
- Poor infrastructure (look at the USA, desperate for infrastructure investment?)
- Low interest rates (allowing ’zombie’ companies with low productivity to survive?)
There are other reasons that in my view have merit, but productivity is such a complex issue, it would be hard to allocate a weight to them:Low investment. Less technology means more work done by people and lower productivity. Statistics would support this. But with interest rates historically low and FTSE at an all-time high why is there comparatively so little investment?
- Management incentives. The bane of all publicly quoted businesses is the short term pressure of quarterly results – upon which a lot of management incentive compensation is based. Small wonder there is little long term thinking. (But the US has the same pressures and they seem to be doing OK in the productivity race).
- Management quality and training. Like investment, there is evidence that the UK does not spend as much as some of its peers on technical and management training. In terms of building a solid base of well qualified technicians, the UK is well behind Germany.
- Business concentration, leading to less competition and higher prices which does not encourage productivity (think US broadband, where most locations have limited competition and prices are expensive by UK standards).
Consulting companies have also weighed in with their own views:
PWC rightly says no one size fits all and raises the following issues to consider:
- Being ‘digitally fit’.
- A flexible workforce.
- Happy and healthy.
- People who perform.
KPMG in a report last November assessed UK productivity against three of the usual suspects – infrastructure, skills and education, and exposure to best practice and international levels of performance.
In a 2016 report, ‘Productivity: The route to Brexit Success’, McKinsey highlight the following key topics for success – improving business and management practices, higher female participation in the economy, boosting public sector productivity (which in some areas has fallen), improving the quality of education, reducing skills mismatches.
I will come back to all the reasons cited above later.
So, the nation (UK) knows productivity is low. There are a lot of clear (and many not so clear) issues to address. Large (and small) management consultancies are on the case, so why is so little happening? The UK consulting market is worth over £6 billion (end 2014) according to Consultancy.uk . Why then is good productivity gain so hard to achieve? Everyone – be they corporate ‘leaders’ or government ministers to appear to understand that productivity is important. Yet the all-important breakthrough and change is still illusive. There is a huge amount of ‘advice’ out there and a lot of money is spent, but little to show for it!
Could we be better? Here is an example. In the UK houses are typically ‘bricks and mortar’. Built on site one brick at a time. In Germany about 80% of houses are built in factories and erected on site. A factory house can be erected and made watertight within three days. Whilst it is very difficult to make comparisons, some research would indicate that the factory built house can be between 20 and 40% cheaper – and of course built a lot faster. If the UK went over to this approach then perhaps the government would be in with a chance of meeting their house building targets (which have not been met for some time.)
This type of change would be massive and require a huge change in approach and thinking at all levels from government, to landowners and to housebuilders. Interestingly, an article in last week’s Economist pointed out that Berkeley Homes were using a site in Kent to trial the building of 1,000 factory built homes. Hopefully this is the start of a breakthrough.
Over the following weeks, I will explore some of these themes. Next time I want to look at the history behind productivity and a possible theory that helps to explain why ‘we’ know about the productivity dilemma, but are so unsuccessful at solving it!