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The productivity gap: A way forward

first_imgThe productivity gap: A way forwardOn 11 Feb 2003 in Personnel Today What can the UK do to improve its output to compete with the rest of theworld? Personnel Today investigates, and finds that with a bit of hard work, wecould easily spark a revival, by Nic Paton The militant downing his tools for yet another tea-break may be an imageconsigned to the history books, but, nearly a quarter of a century afterMargaret Thatcher came to power, the ‘British disease’ of poor productivity andlow skills still stalks the land. By the Government’s own reckoning, UK productivity lags behind that of theUS by 42 per cent, France by 14 per cent and Germany by 7 per cent. Working practices have certainly changed immeasurably since the bad old daysof the late 1970s, but the fact remains that management failings, a skills gap,red tape and a lack of long-term thinking and investment all drag Britishcompetitiveness down. By some estimates, poor productivity deprives theTreasury of about £111bn a year. HR cannot solve the problem of low productivity by itself – business,politicians, economic circumstances, even the country’s infrastructure, allhave to play their part – but it does have a central role to play. The Chartered Institute of Personnel and Development (CIPD) argues that themarginalisation of people management is a key hurdle that British business mustovercome if it is to improve productivity. According to the CBI and TUC, better work organisation, more effectivemanagement, a culture that encourages innovation and employee involvement, andmore focused training and development, all lead to high-performance workplaces.And yet, until now, the role of HR has been largely ignored. Less than onein five organisations implement the kind of high-performance work practices,such as flat structures or autonomous team-working, that have enabled the US tosurge well ahead in the productivity stakes since the mid-1990s. Much of thedirection in the UK has come from politicians, academics and think-tanks moreinterested in looking at macro-economic solutions, rather than the evidence sittingwithin many successful businesses. Effective HR practices are a formula for raising productivity – they help tocreate confident managers who can inspire, innovate and promotehigh-performance team-work, and motivated, skilled staff, who understand whatthe organisation is trying to achieve, and their role within it. Active HR creates productive workers, and it is time that the Government andcertain business leaders recognised this. Personnel Today has been listening toall the talk on raising productivity, but it is now time for action. Our White Paper is essential guidance for organisations and the Governmenton raising productivity. We welcome your views, and once we have consulted withreaders, we will submit all suggestions to the Department of Trade and Industryand relevant representative bodies. ManagementThe problem – poor management leading to unmotivated, uncoordinated work,compounded by badly focused training and a long-hours work cultureA while back, John Purcell, professor of human resource management at BathUniversity, was visiting a potential client who had middle management problemswithin his organisation. “He was talking about his high-flyers,” says Purcell, “so Iasked him how he would describe the others. ‘Donkeys’, he said.” It is this sense of hierarchy in British business – the top talent lavishedwith care, attention, training and development, wile the rest are left to geton with it – which lies at the centre of the UK’s productivity issues. Trade and industry secretary Patricia Hewitt may have raised a few hackleslast October when she described the average British manager as lagging”well behind the rest”, but she did have a point. Last May, for instance, the Council for Excellence in Management &Leadership (CEML) reported that current management and business leadershipdevelopment was ‘dysfunctional’. It found that the UK’s economic performancewas being held back by a shortage of appropriate and practical leadershipskills. Critically, when Porter outlined the reasons behind the gap in his report toGovernment last month, upgrading the skills of the country’s low and middlemanagers was, rightly, at the top his list of priorities. Purcell, for one, believes there has been a failure of frontline management– those at supervisor and junior manager level who perhaps are not on thecareer track, but are at the heart of any organisation’s productivity. Managers are too often promoted to management because they are good at thetechnical side of their jobs, but are then offered little training and guidancein the softer skills of motivation, leadership and appraisal. They are oftenvulnerable to bullying and office politics. The point, however, is not how many managers there are or how much money theUK invests in them, but what direction management is going in, and whether theright sort of people are coming out the other end, argues John Philpott, chiefeconomist at the CIPD. “MBAs, for instance, may be of practical benefit, but are they linkedto the organisations which the students are working for?” he asks. A lot of management training is individualistic and aimed at the high end,rather than geared towards team-work and shared perspectives, or how to improveteams across the business. There need to be fewer, but better, managers, stresses Steve Harvey,director of people, profit and culture at Microsoft. “A lot of British companies have grown up quite hierarchically. Peoplesee management as a reward for years of service,” he says. At Microsoft, internal statistics show that its UK productivity gains aresignificantly higher than in Germany, France and even the US, with the reasonbeing down to “drive, people and vision”, he argues. And research by the Economic and Social Research Council in Decemberconcluded that organisations that involved, empowered and invested in thedevelopment of their employees outperformed those that did not. However, themajority of employers failed to pursue such positive policies. Solutions– HR must understand what itsorganisation needs in terms of management, education, training and developmentat all levels, and then secure senior management buy-in for change.”People management is not really recognised as a vitallyimportant skill for line managers,” suggests Purcell. “What we need is a much more focused, targeted HR strategyfor middle and junior managers.”– Ensure the message that modern, consensual managementtechniques lead to productive staff, is understood throughout the business.Managers need to be convinced they are no longer working in a commandenvironment.Andrew Donovan, head of HR for the Westinghouse ElectricCompany, the European fuels business of BNFL, says: “Managers can dosomething and haul the workforce with them. But as soon as they move on tosomething else, it relaxes back like a spring. So part of management is makingthem walk with you. That is a big role for HR in developing managers.”SkillsThe problem – a poorly directed educational system, a lack of investmentin workplace training, and a decline in vocational training, have led to lowskill levels, particularly on the ‘shopfloor’Closely linked with the failure of management is the UK’s much-cited skillsgap. Indeed, the CEML in its study last May said that management skills were”in short supply from the top to the bottom of organisations”,despite a rapid expansion of formal management education in the past 20 years. At all levels, from the shopfloor to the boardroom, worries abound about alack of skills and the effect on productivity. Porter’s report in particularflagged up the need for more investment in labour force skills. France and Germany, he insisted, have a big legacy of skills in theheartland of their workforce, particularly in manufacturing and engineering.Whereas the UK has too big a pool of relatively low-skilled workers. Part of the skills problem is historical, argues The Work Foundation’sdeputy director of policy research Andy Westwood. Many of the unskilled orsemi-skilled jobs of the past have simply gone. Similarly, the decline of vocational training and the current unpopularityof science and subjects such as engineering in favour of ‘soft’ courses such associology, psychology or media studies, is blamed. Despite its aim to expand vocational training, the Government’s intention tointroduce differential fees for universities and courses could simply determore students from studying such subjects, the Engineering Employers’Federation has warned. At graduate level, the UK by and large stands up there with its competitors– and spending by employers of around £35bn a year is about on par. The big gapis found at the bottom end of the jobs’ market, argues the CIPD’s Philpott.”Some 20 per cent of the workforce is deficient in basic literacy andnumeracy,” he estimates. Too much training is focused at management level, and lower down,organisations are often more prepared to change a production line or process tomatch a person’s skills, rather than the other way round. Employers are critical of the inappropriateness of the skills thatschool-leavers and university graduates possess. “We spend the first five or six months turning graduates into somethingour clients will pay for. There is a gap between what universitiesproduce,” complains LogicaCMG’S group HR director Ian Taylor, echoing whatcould well be a comment in many boardrooms across the land. High-performanceteamwork is needed to tackle the productivity gap, and education needs tosupport this way of working, he says. Microsoft’s Harvey points out that at junior schools much of the learning isteam- oriented, but this disappears as children get older. Two years ago, the Government set up the Learning Skills Council (LSC) totake responsibility for the funding and training of over-16s in England. At thesame time, it scrapped the 70 or so National Training Organisations andreplaced them with a single Sector Skills Development Agency. The primary achievement of the LSC so far, Westwood argues, has been to giveemployers much greater leverage to get skills back on the agenda. The establishment of staff training pilots giving small firms 150 per centreplacement costs of individuals going on level 2 training, has also been avaluable step forward. “What they have done has vastly changed the infrastructure on thesupply side, and made sure employer voices are there,” says Westwood. Buthe adds that with this comes an onus on industry. If things don’t improve,ministers could look to impose statutory training agreements within sectors. Porter believes industry and government need to collaborate more with theuniversities and technology schools to create a better flow of education,knowledge and skills. Dynamic competitive economies, he said, have clusters ofthese institutions mostly financed by the private sector. Solutions– HR should conduct skills auditswithin their organisations and act on the findings. Training needs to be tiedin with business aims.”Everyone spends money on training managers to manage, butwho spends money on training employees on how to behave? You must have theright people in the first place,” explains Harvey. “A lot of peopleget into their organisation and forget that they are still learning , becausethey are so busy doing.” – Improve HR’s own skills, at both a strategic andtransactional level.”Culturally, HR has to get away from the ivory tower. Itneeds people who are prepared to get their hands dirty,” says Alan Bailey,head of communications and change management at Xchanging.Innovation & short-termismThe problem – short-sightedness byinvestors, the City and management, leads to a culture of short-termism, and anunwillingness to innovate and invest in research and developmentThe stock market is notoriously impatient and rarely admits to being wrong.For example, would many City analysts (and there were many at the time) nowadmit to being part of the crowd urging Siemens in the late 1990s to follow theMarconi route and dump heritage for sexy, high-tech investments? A lack of spending on infrastructure, research and development can seriouslyhold companies back, concedes the CBI. Long-term investment in innovation – again a key Porter demand –infrastructure and plant all require a stable economic background. But theunrest of the 1970s, the painful reconstructions of the 1980s and critically,the boom and bust of the early 1990s, still cast a long shadow over Britishbusiness. “For the last generation, we had one of the more unstable economies inthe world, and that led to a tendency to a short-termist approach. In the past10 years that has come round, but at the same time, manufacturing has beenunder increasing pressure,” says the CIPD’s Philpott. “Manufacturingis the wellspring of innovation, but we have a long tail ofunder-achievement.” Quite rightly, the US has a world-class reputation for investment in newworking practices, technology and machinery. While the UK is home to some ofthe great innovators, it has a reputation (with a few exceptions) of beingunable to turn thinking into successful commercial reality. Quality and innovation exist, but the rate at which they happen is muchslower than in Canada, Sweden and Taiwan. Some of this goes back to the education system, and the need to bring on theright numbers of scientists and engineers. Organisations are also often hamstrung by the belief that even if they didinvest in equipment, the workforce would not have the skills to make the bestuse of it. Professor Shaun Tyson, professor of HR management at Cranfield School ofManagement, suggests we need a culture shift in training. “In Germany,they value education and training enormously. Unless you are well educated andtrained, you do not have any status,” he adds. Which brings us back toPorter’s point about the importance of institutions, such as universities,acting as centres for research and development. Technology is consistently two to three years ahead of the way that peopleuse it, says Microsoft’s Harvey. “We are constantly sharing tips andtricks. The impact can be phenomenal. We spend time just calling out things tothose around us,” he says. The company spends £5bn a year on research anddevelopment, and ensures that all staff have shared calendars, contactdatabases to spread information. Solutions– Position HR at the centre ofimproving communication and employee involvement, and research the implicationsof different types of work practices”Business strategies have been coming down in terms oftime horizons – now they’re around two to three years. But a lot of the thingsHR is doing – reward schemes, graduate recruitment and so on – are being doneon much longer timeframes. Businesses need the confidence to work in thelong-term,” says Tyson.– HR needs to champion new thinking throughout theorganisation, ensuring functional boundaries become blurred and acting as acatalyst of change “HR needs to demonstrate that it is beyond the HR functionitself,” says the CIPD’s Philpott. Red tapeThe problem – employers are havingto spend too much time and money sorting out the red tape surrounding newregulations at the expense of getting their businesses into better shapeFew would dispute that red tape is a burden on businesses. Over the pastfive years there has been a wave of new legislation on businesses, with no endin sight. This year alone, there’s the removal of the working time opt-out, theadvance of the Agency Workers Directive, the introduction of the Employment Actand new discrimination laws. The Institute of Directors last year estimated the recurrent annual cost ofthe employment regulations introduced in the past five years could be as muchas £6bn, with the costs rising as regulations actually come into force. The British Chambers of Commerce, meanwhile, calculates the cost to Britishbusiness of increased regulation has risen from £5bn since January 2000, to£15bn in May 2001. What’s at issue, however, is how much of a drag on productivity this extraburden is. Philpott of the CIPD, for instance, points to the fact that, as muchof the new regulatory framework has emanated from Europe, France and Germany donot have much less regulation than the UK. Higher tax and national insurance do play their part, but are not a majorfactor, he argues, with a lack of investment in capital and R&D more theissue. He adds that employment laws per se may be less of a barrier to productivitythan restraints on planning or environmental regulations, for example. “We have had 20 years of a relatively light approach to regulation. Nowwe have a huge tide coming in on us and it is difficult to absorb it in onego,” he says. Michael Porter does not view the UK as an over-regulated economy. Hebelieves more regulation promotes innovation and has called for increasedprice-competitiveness to open up rivalry and force the development ofhigh-value products and services. The UK must ask itself why new businessstart-ups are less likely to survive here than in the US and Europe. For employers, the DTI too often stands for ‘desperately tying up industry’,with captains of industry bemoaning the department’s enthusiasm for red tape,both European and home grown. “Employment law and some of the ways things are now moving are notnecessarily to the benefit of organisations. Some of the employment tribunalrulings are rather strange,” says BNFL’s Donovan. The Government’s focus on public sector investment has led to a 0.5 per centfall in productivity, argues Patrick Minford, professor of economics at CardiffBusiness School, with growth in public sector spending proving unproductive sofar. “HR people tend to be in larger firms, which do not have such a problemwith these things, but a lot of the burden and costs are falling on smallerfirms. All that happens is they just do not take risks for fear of ending up incourt,” he says. Higher capital allowances would help profitability and productivity, arguesthe EEF’s Peedle. The TUC and CBI have, in turn, called for a more stable tax regime and anincrease in long-term investment – for example, on the country’s transportinfrastructure.Solutions– More focus by the DTI on supportingcompetitiveness.”The frustrating thing is that the DTI talks about howindustry should become more productive, and then it imposes more and moreregulation on a wider range of areas,” says LogicaCMG’s Taylor. – Better implementation of policies, both by the Government andmanagers.”One of the most important things that came out [ofresearch with the CIPD] was not the existence so much of a given set ofpolicies and practices, but the way line managers brought them to life,”says the University of Bath’s Purcell.Personnel today’s productivity white paper The following are 10 action points for organisations andGovernment.1          Recognise that effective HR – whichencompasses recruitment, training reward, job design, job quality andcommunication – is vital to tackling the productivity gap2          Ensure that HRstrategies aimed at improving productivity are in tune with the organisationalgoals, and that their effectiveness is measured 3          High-performanceteam-working is the key to raising productivity, and needs to be supported bytraining and reward structures 4          More researchis needed on the links between good people management and productivity5          Managers need to have access to bettertraining and development which is focused on the needs of their role and theirorganisation – particularly in the middle and junior ranks 6          All companies should carry out skillsaudits and act on them, with particular attention to lower ranking staff.Again, training must be tied to business aims and goals7          Employers needto further develop their psychological contract with staff, ensuring that bothmanagers and workers are motivated 8          HR must be thecatalyst for improving communication, employee involvement and planning9          The DTI mustwork harder to minimise the pain of red tape and improve how it implements regulations10        HR must championand remind organisations of the need for long-term thinking and investment, andthe critical role of innovation in improving productivity Previous Article Next Article Comments are closed. 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