Last reviewed 20 June 2016

It will not have escaped your notice that improving productivity is one of the Government’s top priorities, says Dawn Nolan. As economists the world over crunch the latest data and debate the intricacies of the productivity challenge and so-called “puzzle”, we are left to ponder: why, when UK employment has increased, has workers’ output not improved at a similar rate? Despite trying to fathom out why productivity is so low, “there’s no single explanation or agreement on which explanations are more important than others”, confirms Mark Beatson, Chief Economist at the CIPD. In reality there is no simple solution, otherwise we would have solved it by now.

The UK’s poor productivity record is one reason average earnings in the UK are still lower in real terms than they were in 2009. Making our businesses more globally competitive and raising living standards relies on productivity growth — and providing more goods and services to consumers translates to higher profits. “If the UK could match the US for productivity, GDP would go up by 31%,” insists Business Secretary Sajid Javid. Without bamboozling you with statistics, in a nutshell, we must produce more with less.

With this intention, last July, the Government launched its 15-point “productivity plan” Fixing the Foundations: Creating a More Prosperous Nation — aimed at tackling the UK’s weak productivity and improving economic output. This included the creation of a business task force led by John Lewis Chairman Sir Charlie Mayfield to help employers find ways to boost it.

So where does HR comes in? The Productivity Challenge: Unlocking Workplace Potential report confirms that: “While national governments’ macro-economic policies and EU-wide structural reforms have a significant role to play in boosting productivity, the management practices used within a business can also have an impact.” It is these management practices that HR professionals must influence to help organisations ratchet up productivity.

Even so, when we delve into what we mean by “productivity”, not all HR professionals are on the same page. “Productivity can be thought of as how effectively organisations, and the people working in them, produce value from available inputs. It’s difficult to think of something more important for the success of any organisation, yet understanding of the term in UK business is patchy to say the least,” says the CIPD report Productivity: Getting the Best Out of People — based on two YouGov surveys (totalling about 1600 HR leaders) which probed HR’s knowledge of the concept.

“It’s not always terribly well defined,” explains Beatson. On the face of it, the majority of organisations seem to understand it, with two-thirds of the businesses surveyed using the term. “But most organisations are talking in broader notions of ‘performance’ which is more vague — usually referring to profitability, sales and revenue,” he cautions.

Similarly, of the two-thirds which say they measure it, many appear to be thinking about business performance more generally. Worryingly, a third of businesses in the UK do not measure their productivity at all. Yet clearly, all organisations should strive to do this, especially given that the research found evidence to suggest those ones measuring it have higher productivity.

That said, of the many ways to measure productivity, the most usual is labour productivity — with the key measures being output per hour worked and output per worker. To put some perspective on just how much the UK lags behind, note that the USA, Germany and France are 30% more productive per hour worked. Beatson reinforces the long-standing nature of the problem and how the UK has lagged behind the USA since 1900: “You could argue that, post-recession, the gap has widened but it has been around for decades.”

So how can HR make an impact? More focus on the “people dimension of productivity” is needed, as Beatson describes it. HR should step out of their silos and make connections with the operational side of the business. “To what extent does HR collect measures that reflect the contribution people make — not just the cost?” They tend to measure absence and headcount but “need to look at what measures quality and contribution”, he explains.

KPMG Head of Retail, David McCorquodale, argues that “retailers are getting more sophisticated at how they measure productivity”. Talking in Retail Week, he uses the example that M&S has store managers on bonus schemes that reward store performance and customer satisfaction. “The old ways of measuring productivity (eg simply tracking sales) are not always the right ones for the new ways of doing retail,” he warns. The Fixing the Foundations report identified retail as one of five sectors where there is a productivity shortfall.

So how is HR helping to raise productivity and improve business performance through workplace practices? In Productivity: Getting the Best Out of People, the most common ways cited were workforce and succession planning (60%), performance management (59%), improving leadership and management capability (51%) and training and development (51%). This needs to be widespread — in fact, firms where over 75% of the workforce have participated in L&D activities are more likely to rate their productivity highly.

The report highlights clear links between a firm’s relative productivity and its product/service strategy and internal culture — “not in terms of there being one type that is right but how well the ‘fit’ is for what you want you to do”, clarifies Beatson.

It is about choosing the right incentives, too. Beatson cites performance pay as a strong motivator or demotivator. “Or if teamwork is more important, then profit share and a group bonus.” It is about “alignment” with where the organisation wants to be. You need to ask “how do we want to work?” Ultimately, it is about choosing the right methods for your organisation — “every one has successes and failures”.

So which sectors have the most scope to improve productivity? “We lag behind on everything so all sectors have the potential to improve,” asserts Beatson. “The sectors that are traditionally labour-intensive but where technology can make a difference.”

The UK’s food and drink sector has been a quiet success story, increasing productivity by 11% in the last five years. Global food giant Nestlé even has a section on its website dedicated to sharing insights on boosting productivity which show “deep links between productivity gains, new technology and sustained improvements by Nestlé’s people at all levels”. Specifically, under the heading People, Technology and Productivity, it points out that combining investment in technology and people is key to determining the productivity of individual firms … and how “these two forms of investment are … highly interdependent”.

Also, it talks about its efforts to improve skills and recognises that “an important factor in company level productivity in the UK is the skill-set of entry-level workers”.

Commenting on this, a Nestlé spokesperson said: “By supporting our employees in developing the skills that they need to use new technology, we have been able to make strong productivity gains across the business, while empowering our workforce. As a business we are working together to meet the productivity challenge we have here in the UK.”

Automotive parts manufacturer and consulting company Unipart is also rising to the challenge. A key focus for HR is to “help drive productivity (not just performance)”. “In Unipart we believe there is a strong link between employee engagement and productivity,” says Group HR Director John Greatrex. This has meant developing lean HR models aligned to the business to increase engagement and drive productivity.

Of course there is no magic formula for improving productivity and performance; firms need to work out which strategies suit their business. With greater focus on getting more value out of people and how work is organised, identifying more sophisticated and relevant ways to drive and measure productivity will be key. This will vary across sectors and businesses but it is both a challenge and an opportunity for HR. “The extent to which HR professionals grasp this opportunity will depend on how engaged they are with the needs of the business and the need to improve,” notes Beatson.