It is now 10 years since the start of the most recent financial crisis. Despite years of austerity measures, the UK economy has largely recovered, and is now weathering the new era of post-Brexit uncertainty.
Yet despite a relatively rapid return to growth following 2008 and the huge success of maintaining high UK employment levels through the past 10 years, one economic performance measure remains incredibly elusive – productivity. Chris Reeves examines the economic puzzle of UK productivity.
Productivity has remained flat over the past decade and while productivity growth has slowed in most European countries, as well as the US and Japan, the UK has underperformed nearly all the G7 countries (16% lower).
To put this into context, a worker in the UK produces 10% less value than an Italian worker, almost 30% less than a French or US worker and more than 30% less than the average German employee for the same hours worked (source FT.com).
The lack of improvement in the UK’s productivity has meant that, although we continue to work hard as a nation, we are not really increasing our wealth.
The fact that UK productivity has remained flat for 10 years in an era of significant technological advancements is extremely puzzling. If technology has one sure-fire impact on the economy you would think it would be that of improved productivity.
So, why has productivity in the UK remained flat in a period of obvious digitalisation, and why does it matter?
Chris Reeves, director, country digital acceleration at Cisco, recently sat down with The Manufacturer to discuss how UK businesses can harness the next phase of digital adoption:
Chris will be speaking at The Manufacturer Leaders Conference, alongside 120+ top-tier speakers. Join 600 industry leaders at the UK’s largest digital manufacturing event: 15-16 November, Exhibition Centre Liverpool. To register, visit themanufacturerleadersconference.com/
The productivity equation
The productivity equation is pretty basic: Value Created ÷ Hours Worked
In recent decades, the UK has addressed productivity by driving process improvements through ‘lean’ methodologies and just-in-time style supply chains. This approach has delivered results, but has often been focused on doing the same things more efficiently, reducing the hours worked on a task for the same value created.
This is a valid initial step, but after multiple cycles the law of diminishing returns inevitably kicks in. This is also true of much of the technology that has been introduced over the years. Some of the benefits of previous technology improvements were fully realised decades ago and that legacy infrastructure, on which businesses rely, often now proves a barrier to further technology-based transformations.
As well as automating manual tasks, future technology adoptions will increasingly be about doing things that could not be done before and creating whole new business models. It could be that the level of transformation required for this next step is in-fact proving a barrier to digital adoption and hence the improved productivity that comes from it.
So, compared to previous process-based improvements to productivity, the next, more challenging step will be to focus on the productivity equation’s numerator – value created.
The journey so far
Internet of Things (IoT) solutions are now proven in the field, their cost is very much reduced from early deployments and new potential applications are appearing all the time.
We now need to transition from dispersed pilot implementations to more ambitious deployments integrated to open platforms. We are already starting to see how businesses are looking at the data they can collect through digital technology, and deciding what to do with this potential asset.
Should they use it to drive their own marketing? Share it with their supply chain on an open platform? Or use it to drive their decision making; for example, to inform new product development or partnership strategy?
Likewise, the connectivity and potential collaboration that digital brings can open up new supply chains, new markets and create different ways of working. Businesses are increasingly offering new services enabled through IoT and digital platforms.
Although there are many new opportunities, a lingering challenge is identifying how to monetise them and hence turn them into tangible value for the business, as well as wealth for the company and staff.
A digital future
Turning to the future, success will require a shift in approach. Because there isn’t an easy way to tread new paths, those who really win this race will be the ones who embrace the new digital business models rather than trying to derive more efficiency from what they do already.
So, whether you belong to a huge blue-chip company, a third-sector organisation, a small family business or a high-tech start-up, here are the three reasons you need a digital strategy to boost your productivity:
Change is inevitable
If your business hasn’t changed, it either soon will, or it soon won’t exist. Therein lies the need for urgent action. Those challenged by start-ups (eg, retail and financial services) have digitised because they have had to in order to survive, while other sectors have been slow to change.
The sooner organisations embrace the radical change digital can bring, the sooner they will protect their current and future positions and realise the benefits. Digital doesn’t replace strategy or business acumen, but it is now integral to it.
Relying on cheap labour won’t make us all richer
For years, relatively low wages in the UK removed the impetus to drive productivity improvements. Far less stringent labour regulations than much of Europe previously made investing in automation technology an expensive option.
With the introduction of the national living wage in 2016 and the potential end of free movement of labour, the supply of cheap labour may dry up. We need to keep our labour flexibility, as the re-allocation of labour will be key to the transformation required, but transition away from a low-wage economy. Skills, as always, will be key and we should aim for a high-wage/high-skill economy driven by technology adoption.
There’s no such thing as digital skills
What we class as ‘digital’ skills today, will be commonplace tomorrow, where digital natives (millennials, Generation Z and their offspring) will be in the majority. Digitisation will impact jobs – high-skill jobs and low-skill jobs, yet technology has always created more jobs than it’s destroyed in the long term.
We need to get on with up/re-skilling our existing workforces and scoping our education and training to meet our needs, for example around cyber-security.
From my perspective, I can’t believe we will have another decade of flat productivity while there are so many amazing opportunities. But action is needed, and productivity growth won’t happen without it.
So, here’s what you can do:
- Take a look at Bethebusiness.com a new online resource that allows businesses to assess themselves via a benchmarking and measurement tool, and a collaboration hub that shares best practice from across the UK. Launched in July 2017 by the Productivity Leadership Group (PLG), of which Cisco is a proud member, it’s free to use.
- Visit Innovate UK, the UK government’s innovation agency for funding innovative solutions to challenges in emerging and enabling technologies: www.gov.uk/government/organisations/innovate-uk