Productivity is a hot topic for investors, business executive and the media. Productivity is one of the reasons for the recent stock market run up. Productivity is a leading indicator for earnings and therefore share price. Business executives are interested in productivity for much the same reason The media is watching productivity as higher productivity signals a continued weak job market– the so-called jobless recovery.
The interesting point is that the productivity gains that everyone is watch are a mathematical phantom, particularly if people remain on their current course and speed. Here is an example of the math. It’s overly simplistic but illustrative:
Say your company has revenues of $1,000 and 200 employees. The revenue per employee is $5.00; remember this is a simple example.
Now in the recession, the company’s revenue drop by 20% to $800 while the company cuts its workforce by 33% to 130 people. Their productivity has risen to $6.15. Expenses are lower and this seems like a smart strategy. This is the course that many companies took in 2009 to survive the recession – as everyone worked harder in order to balance resources to revenues.
The recovery comes and revenues grow by 15% from their $800 level to $920 while the employee base stays the same at 130 people. Recovery productivity soars to $7.08. The company looks great with productivity up by 42% compared to its pre-recession levels. See figure below:
Sustaining this level of productivity is the question facing investors and executives. It is a particular concern in enterprises that dehydrated their operations during the recession. Dehydrating removes the cost without changing the underlying process or operation.
It is the equivalent of losing water weight at the start of a diet.
Unless they change their operations, the company will have to hire people as revenues grow which will decrease productivity and earnings as well as put downward pressure on market value.
Companies that dehydrated their operations will have to invest either in new people or in changing the way they work. In either case they cannot be expected to sustain without making a change.
In other words, without change companies will regain their waterweight to the detriment of performance and market value.
Barclays Capital economist Michelle Meyer was quoted in the Chicago Tribunelast week that, ”you can’t have productivity this high forever unless there are tremendous technological improvements.”
That is where IT’s future lies.
The differences between productivity and efficiency are subtle but important. The efficiency gains made during the recession came from lower in the cost of operations faster than the loss of revenues.
However, sustaining that level requires a shift from managing the cost of operations to managing the value created by those operations. Value created per unit is a productivity measure that is enhanced by the types of information, process and automation solutions delivered by IT.
This is a challenge for IT as Meyer further commented that there is no major technology boom now like the Internet in the 1990’s. I believe that there is a hidden boom coming, but more on that in another post.
Investors need to ask CEO’s how they plan to sustain current productivity levels. If the answer is, we will work harder, then get ready for resource requirements to rise and productivity to fall. If the answer is, here is how we are changing operations, processes, products and services, then there is a greater chance of holding onto the productivity and market value.
Admittedly this is a simple example, but one that illustrates the difference between companies that will report peak earnings at the start of the recovery, only to fall back to their old performance levels and those that use the recovery as a new benchmark for performance and their market value.
Without a solid strategy to lock-in or extend productivity companies will report ‘peak’ earnings for the fourth quarter of 2009 and the first quarter of 2010 which will degrade bringing their earnings and stock prices back to earth creating nether wealth for investors, earnings for managers or jobs.