Why productivity is so weak at UK companies
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If there is a creed of productivity, then Chris Mayne is a believer. Promoted to managing director of precision systems maker Forsberg Services in 2020, Mayne has enthusiastically applied most of the known prescriptions for business improvement.
He has digitised, clustered, scorecarded, upskilled and leadership-developed Forsberg and its 50 staff to annual turnover of more than £12mn, from £6mn in 2020, when the privately owned group employed 32 people.
Like many managers, Mayne does not use the P-word much, arguing that it “means very different things in different contexts” and might not be an appropriate way for a company like Forsberg, whose customers include big defence manufacturers, to approach making bespoke precision systems.
But he is still in the vanguard of a collective UK effort to solve the puzzle of why British workers turn out less for every hour they work than their counterparts in other advanced economies such as the US, Germany and France.
According to the latest figures from the Office for National Statistics, published earlier this month, output per hour worked was just 0.6 per cent above its pre-pandemic 2019 average in the first quarter of 2023.
That leaves the UK’s productivity on the same shallow upward trajectory that it has followed since the financial crisis, well below the trend that prevailed between the early 1970s and 2008.
Productivity may be an abstract concept for many, but its consequences are real. Higher output leads to better wages and a more prosperous economy. But UK productivity has grown by just 0.4 per cent annually in the years since the financial crisis, less than half the rate of the 25 richest OECD countries, according to think-tank the Resolution Foundation. UK household income, which used to be ahead of competitors such as France and Germany, now lags behind.
Both main UK political parties are well aware that raising productivity is one of the keys to reinvigorating the economic growth that will be needed to improve public services and reduce taxes from multi-decade highs.
Yet it shows little sign of improving. New information gathered by Be the Business, a government-backed charity dedicated to spreading the productivity gospel in the UK, suggests British companies are long on confidence but short on commitment when it comes to action and investment in becoming more productive.
Based on responses to a questionnaire circulated to more than 4,000 companies with fewer than 250 employees across the G7, UK businesses rank fourth out of the seven big developed economies on confidence. But they come fifth on business performance and sixth on “capabilities”.
Overall, UK companies are only marginally ahead of their Japanese counterparts when it comes to investing in areas such as management and leadership and innovation, and below Japan on taking action to improve operational efficiency or human resources processes and systems.
“Confidence can be a good thing — self-belief is powerful,” says the report. “However, an alternative way of putting it is that we [the UK] are good at complacency.”
British diseases
If many UK managers are smug or passive, it is not for want of trying to shake them into action. Attempts to crack the productivity conundrum date back decades and run across successive governments, via the highest tables of academia to the boardrooms of big companies, which research suggests are better than smaller companies at managing their way to improved productivity.
Some of the UK’s productivity problems are down to structural forces that individual managers are powerless to influence, such as the overall UK investment climate, its patchy educational outcomes and skills gaps or its complex planning regime.
Political instability and the new regime of post-Brexit EU trading rules have also impaired companies’ confidence in planning and investing. “Three prime ministers, four chancellors and three business secretaries over a very short period means it’s a bit stop-start,” says Mandy Ridyard, co-owner and finance director of Produmax, an aerospace components company.
Another potential drag on improving output per worker is a relative lack of business investment. “If UK business investment had matched the average of France, Germany and the US since 2008 . . . our GDP would be nearly 4 per cent higher today, enough to raise average wages by around £1,250 a year,” the Resolution Foundation said in its recent report “Beyond Boosterism”, part of its Economy 2030 research on the UK’s economic prospects.
The study found that the UK’s share of business investment in GDP fell from 16th place in the period from 1995 to 2007 to 20th in 2008-21, ahead of only Greece in a sample of 21 high-income OECD countries. Over time, the report goes on, that “is a recipe for relative decline”.
The foundation also identifies smaller businesses’ lack of access to long-term capital as an obstacle to investment and growth. It recommends stronger worker representation on larger company boards and urges the government to stabilise economic policy, push through pension reforms to reduce dispersed and distant share ownership and adjust tax incentives for capital and research investment.
Bart van Ark, managing director of the Productivity Institute, a research organisation established in 2020, believes there is a “lack of interest in investing” by many companies that are satisfied with growing slowly and servicing a local market.
“Basically they’re just trying to get by and if you are just trying to get by, you aren’t thinking about making a long-term investment,” he says.
Up to the job?
Van Ark’s impression is reinforced by earlier research from Be the Business that suggests managers have been treading water since the onset of the pandemic.
The proportion of UK businesses that have taken steps to improve or try regularly to measure and improve productivity is slightly down or unchanged since 2020. Some 37 per cent of businesses have discussed or planned improvements — up 8 percentage points between 2020 and 2022 — but not yet taken action.
That in turn feeds into concerns about the wider calibre of British managers, memorably voiced in 2017 by Andy Haldane, then Bank of England chief economist, who suggested “a (lack of) management quality” was one reason for the UK’s long tail of lagging businesses.
In fact, “our long tail doesn’t seem to be much worse than others”, says Greg Thwaites, research director at the Resolution Foundation, and most businesses in the long tail are either too small or simply too unproductive for remedial measures to have a big macroeconomic impact.
Be the Business chief executive Anthony Impey, who has first-hand experience of starting and running technology businesses, also defends British managers. Although he acknowledges the cliché that too many small company leaders work “in” their businesses, rather than “on” their business, he points out that the obsession with day to day operations often reflects the ownership structures of such firms.
Many founders mortgaged their homes to launch or sustain their businesses and for those owners “there’s a scale of jeopardy which is very often overlooked, because economists and those in big businesses don’t have these sorts of stakes in their jobs”, he says.
“If you have that kind of pressure, you’re going to work in your business 12 hours a day”, leaving little time or energy to plan investment or pause operations to implement improvements.
The argument about the lower quality of UK leaders and managers still sticks, however, as does the curse of the “accidental manager”. That term was coined by the Chartered Management Institute well before the pandemic for people promoted from operational to managerial roles with no preparation. The CMI estimates fewer than one in five UK managers received any training before taking on the job.
Nor do UK managers, accidental or otherwise, seem especially keen on asking for outside advice. The government’s long-running survey of small businesses tracks how many leaders have sought “external advice or information” on their business (excluding “casual conversation”). That proportion dropped from almost a third to less than a quarter between 2018 and 2020 and was almost unchanged in 2021, according to the latest report available.
That is worrying because managers who do not take advice tend towards overconfidence, according to the Productive Business Index, which Be the Business has been compiling since 2021. Its latest edition found that business leaders who took no external advice were actually more confident about their leadership and management skills than those that did seek outside support. But managers without external advisers or non-executive directors were less likely to have a two- to five-year strategic plan or to feel they were prepared for unforeseen events.
In other words, Haldane’s 2017 quip that many UK managers are like the majority of car owners, who believe, implausibly, that they are above-average drivers, is being borne out.
This is part of a vicious circle. Research on the management capabilities of 8,000 UK companies for a London School of Economics programme on how to boost productivity through innovation found that better managed companies were better at forecasting both their own sales and wider GDP growth, and therefore could “make superior operational and strategic choices”.
But many “just-getting-by” companies do not even have enough bandwidth to apply for the government support that is already available. Take-up of the £500mn Help to Grow business support programme introduced by Rishi Sunak, then chancellor, in 2021 was initially lower than expected, for instance. Business schools rolled out 12 weeks of management training under the scheme for 200 groups of leaders of some 3,000 smaller businesses but they had to cancel a planned further 122 cohorts, according to an April 2022 evaluation. By February this year, the number of cancelled cohorts had dropped, however.
How to improve
If there were a single catch-all prescription for self-improvement, businesses would probably have applied it by now. Instead, recent analysis suggests companies need to apply a range of measures.
One would be developing and improving management skills and practices. US smaller companies top the ranking of G7 countries on management and leadership and operating efficiency, and are consistently higher than their UK equivalents in their plans to improve capabilities over the next 12 months.
Similarly, companies in all other large countries except Japan outstrip the UK on the extent to which they say they have used, or will use, a wider business network to support their development.
That again puts Chris Mayne at Forsberg in what is probably a minority of UK managers. He has upgraded his own skills in the past five years, pursuing a masters in management and leadership at Lancaster University. He also identified, with other local electronics businesses, the “massive gap in the curriculum around electronics skills”.
With five other companies, Forsberg set up a boot camp focused on practical challenges, which offered training to 100 people, and it is part of a 24-member “ElecTech” innovation cluster that allows Mayne to draw on the experience of larger companies and academia, as well as support smaller ones.
Technology adoption could help companies improve processes, measure productivity more accurately and refine forecasting. The first lockdown provided a “perfect opportunity” for Forsberg to push through the digitalisation of its enterprise resource planning system, for instance.
But measuring those gains remains a challenge. When the Chartered Institute of Management Accountants (CIMA) polled its members in 2021, it found more than half had faced difficulties measuring productivity because they had difficulty attributing value to intangible assets or were hampered by the quality of inputs and outputs.
Van Ark also thinks UK companies struggle to define and align their efforts to improve productivity. While the human resources team might think of the concept in terms of training or retention, the chief financial officer would look at cost efficiency and return on investment. The operations director might focus on making best use of technology, while the marketing department would concentrate on improving the value of the brand.
There is a “missed opportunity in the boardroom” to address the tensions between different departments’ understanding of productivity. “Don’t beat yourself to death to get a good definition,” he advises. “Think about the narrative and the conversation. If you have this conversation you will know what the key drivers [for improvement] are.”
Still, advocates of bottom-up productivity improvements believe much could be achieved by individual businesses making quite incremental improvements. Some of those improvements could be as simple as the initiatives being tried at Produmax.
Ridyard says the aerospace components company used the period of furlough during the pandemic to start a “skills buddy-up system”, cross-training staff in unfamiliar areas.
Like Mayne, she doesn’t use the term productivity much, but “if you look at [it] as leadership, engagement and technology, the buddy system allowed you to pick up a brand new skill and go and train in areas you wouldn’t be able to train in normally”.
For instance, after pairing quality control staff with production staff, Produmax realised it could free up capacity during the day by calibrating its quality measuring machines at night. Partly as a result of such small changes, Ridyard expects to see a surge in productivity next year as Produmax reaps the benefits of “what we’ve learnt and what we’ve put in place”.
The well-known “Gantt chart” traditionally used to assess progress in projects, is “a bit dull”, says co-owner Ridyard. As an alternative, Produmax has introduced the “balls of destiny” at its morning meeting. Each project delay is represented by a football, basketball, rugby or tennis ball that is held by the relevant manager. When bottlenecks are cleared, the balls of destiny are passed to another division — in the manner of the respective sports.
“For me, productivity — it’s about solving problems and finding fun ways to move things more quickly,” says Ridyard.
Data visualisation by Keith Fray
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